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is the All The President's Men of the savings 
and loan crisis." —Jack Anderson 








ISBN 0-07-050530-7 >$n-T5 


The Looting of ^ 
America 's Savings and Loans 

by Stephen Pizzo, 

Mary Fricker and 

Paul Muolo 

It's the biggest heist in U.S. history- 
billions of dollars are missing from the 
nation's savings and loans, and no matter 
how good one's accountant, it's going to 
cost every American taxpayer at least 

Inside Job is the compelling story— 
until now untold— of where the money 
went. In 26 hard-hitting, solidly docu- 
mented, and eye-opening chapters, inves- 
tigative reporters Stephen Pizzo, Mary 
Fricker, and Paul Muolo deliver the 
answer: Over a period of seven years, 
a greedy network of swindlers, mobsters, 
S&L executives, and con men have cap- 
italized on regulatory weaknesses created 
by deregulation and have thoroughly 
fleeced the thrift industry. While it is true 
that economic factors (like plummeting 
oil prices in Texas and its surrounding 
states) have contributed to the crisis, .s(/r- 
ings and loans would not be in the condi- 
tion they are today but for rampant fiaud. 

Read about the financial hit-and-run 
fraternity: men like Michael Rapp, the 
Mafia's stockbroker: Morris Shenker, 
casino owner and former attorney to 
Jimmy Hoffa: Herman K. Beebe, the hid- 
den power behind 100 S&Ls and banks; 
and Mario Renda. tap dancer turned sav- 
ings and loan racketeer. When Congress 
deregulated S&Ls, one eager executive 

{continued on hatkjhip) 


Stephen Pizzo, Mary Fricker 

and Paul Muolo 


The Looting of Americans 
Savings ana Loans 

McGraw-Hill Publishing Company 

New York St. Louis San Francisco 
Hamburg Mexico Toronto 

The Woody Guthrie lyric on page 240 is used by permission © copyright 
1961, 1%2 by Fall River Music, Inc., New York, New York. All rights 

Copyright © 1989 by Stephen Pizzo, Mary Fricker and Paul Muolo. All 
rights reserved. Printed in the United States of America. Except as per- 
mitted under the Copyright Act of 1976, no part of this publication may 
be reproduced or distributed in any form or by any means or stored in 
a data base or retrieval system without the prior written permission of 
the publisher. 

7 8 9 DOC DOC 9 2 10 


Library of Congress Cataloging-in-Publication Data 

Pizzo, Stephen. 

Inside job : the looting of America's savings and loans / Stephen 
Pizzo, Mary Fricker, and Paul Muolo. 
p. cm. 

Bibliography; p. 

Includes index. 

ISBN 0-07-050230-7 

1. Building and loan associations — United States. 2. Building and 
loan associations — United States — Deregulation. I. Fricker, Mary. 
II. Muolo, Paul. III. Title. 

HG2151.P59 1989 89-12519 

332.3'2'0973— dc20 GIF 

Book design by Sheree Goodman 


Dramatis Personae ix 

Introduction: Original Sin 1 

1. A Short History Lesson 9 

2. Shades of Gray 16 

3. Centennial Gears Up for Deregulation 25 

4. $10,000 in a Boot 38 

5. The Downhill Slide 49 

6. Lazarus 61 

7. Back in Washington 77 

8. Tap-dancing to Riches 84 

9. Buying Deposits 96 

10. Renda Meets the Lawyer from Kansas 105 

11. The End of the Line 119 

12. "Miguel" 127 

13. Flushing Gets a Bum Rapp 140 

14. Casino Federal 156 

15. Gray, Stockman, and the Red Baron 177 

16. Going Home 190 

17. Dark in the Heart of Texas 202 

vi ■ 



The Last Squeezing of the Grapes 


The Godfather 


Beebe Gets Caged 


Round Three 


A Thumb in the Dike 


The Touchables 


Friends in High Places 


What Happened? 


Taking the Cure 





Appendix A: The Comptroller Report on Herman K. Beebe 376 
Appendix B: "The Five-Senators Meeting" 392 

Source Notes 405 

Index 429 


This book was three years in the making, and more people deserve our gratitude 
and thanks than space here allows. First among them are our families: Steve 
Pizzo's wife, Susan Pizzo, and sons, Nicholas and Christopher Pizzo; Mary 
Pricker's mother, Sibyl Dameron, and sons, Glenn and Scott Fricker; Paul 
Muolo's wife, Ann Leger. High also on our list are our agent, Denise Marcil, 
and our editors, Tom Miller and Anne Sweeney, who saw the importance of 
this book long before the thrift crisis became standard fare on the evening news. 
We are certain that had they not embraced this project early on, this book might 
never have seen print. In addition, we'd like to extend our thanks to Debra Kass 
Orenstein for her insightful and intelligent legal commentary, and to John Carter, 
copy editor par excellence. Thanks also to National Thrift News editor (and 
thrift guru) Stan Strachan, who patiently endured as two of his reporters were 
distracted by this project. Special thanks to all those we could not name in this 
book: the U.S. attorneys, FBI agents, federal regulators, and attorneys who, at 
risk to their careers, spoke to us and sent us critical documentation because they 
believed the public had a right to know what happened. They all know who 
they are, and we thank them sincerely. Finally, we want to acknowledge the 
fine reporting being done around the country by dozens of good journalists. 
Without access to their investigative work, we could not have written this book. 



Descriptions include only infonnation that is relevant to the stories in this book. 

John B. Anderson: California farmer who bought the Dunes Hotel and Casino in 
Las Vegas from Morris Shenker in 1984 and put it into bankruptcy in 1985; borrowed 
from many S&Ls. 

Ottavio A. Angotti: Chairman, Consolidated Savings Bank, Irvine, California. 

Frank Annunzio: Democratic congressman from Illinois. 

Jack Atkinson: Vernon Savings borrower. 

George Aubin: A consultant to Mercury Savings, Witchita Falls, Texas; and Ben 
Milan Savings, Cameron, Texas; associate of Herman K. Beebe. 

Farhad Azima: Director, Indian Spring State Bank, Kansas City, owner Global 
International Airways. 

James Baker: White House chief of staff, 1981-1985; treasury secretary, 1985-1989. 

Tyrell Barker: Owner, State Savings in Lubbock, Texas, Brownsfield Savings in 
Brownsfield, Texas, and Key Savings, Englewood, Colorado. 

Doug Barnard: Democratic congressman from Georgia; chairman of the Commerce, 
Consumer and Monetary Affairs sub-committee of the House Committee on Gov- 
ernment Operations. 

Ben Barnes: Lieutenant governor ofTexas 1968-1972; associate of Herman K. Beebe 
and John Connally. 

Charles Bazarian: Oklahoma loan broker; owner CB Financial. 

Gilbert Beall: Borrower from Acadia Savings, Crowley, Louisiana; purchased Po- 
conos property from Jilly Rizzo and Anthony Delvecchio. 

Herman K. Beebe: Louisiana businessman; owner AMI Inc. and Bossier Bank & 


X ■ Dramatis Personae 

Trust; subject of 1985 comptroller of the currency report which listed 109 financial 
institutions related to Beebe. 

Richard Binder: Borrower from Centennial Savings, Guemevillc, California; as- 
sociate of David Gonvitz. 

William Black: Director of litigation in the FHLBB Office of General Counsel 
1984-1986; deputy director, FSLIC, 1986-1987; general counsel, FHLB San Fran- 
cisco, beginning in 1987. 

Spencer Blain: chairman. Empire Savings, Mesquite, Texas. 

Ellis Blount: FBI special agent on the Herman K. Beebe case. 

Jack Bona: borrower with Frank Domingues at San Marino Savings, San Marino, 
California; purchased Atlantic City Dunes Hotel in 1983. 

Douglas Bosco: Democratic congressman from California; borrower from Centen- 
nial Savings, Guerneville, California. 

L. Linton Bowman: Texas savings and loan commissioner, resigned in 1987. 

Joseph Boyer: FBI special agent on the State Savings of Corvallis, Oregon, case. 

Eric Bronk: attorney and consultant for Robert Ferrante's Consolidated Savings 
Bank, Irvine, California. 

Mitchell Brown: owner with E. Morton Hopkins of First National Bank of Marin; 
borrower at State Savings of Corvallis, Oregon. 

Neil Bush: former director, Silverado Savings, Denver. 

Christopher Byrne: senior trial attorney, FDIC. 

Joseph Cage: U.S. attorney, Shreveport, Louisiana, on the Herman Beebe and 
Acadia Savings cases. 

Lance Caldwell: U.S. attorney, Portland, Oregon, on the State Savings/Cor\allis 

Carl Cardascia: President, Flushing Federal Savings, New York. 

Duayne Christensen: chairman. North American Savings, Santa Ana, California. 

James Cirona: president. FHLB San Francisco. 

Nick Civella: reputed boss of the Kansas City Mafia family. 

Tony Coelho: Democratic congressman from California; chairman House Demo- 
cratic Campaign Committee; became House majority whip in 1987. 

John Connally: Secretary of the Navy 1961-1962; governor of Texas 1963-1968; 
Secretary of the Treasury 1971-1972; candidate for Republican presidential nomi- 
nation in 1980; partner with Ben Barnes in the 1980s. 

Dramatis Personae • xi 

Patrick Connolly: California deputy savings and loan commissioner and, later, ex- 
ecutive vice president of Centennial Savings. 

Ernie Cooper: FBI special agent on the Centennial Savings case. 

Alan Cranston: Democratic senator from California, met with regulators on behalf 
of Lincoln Savings, Irvine, California. 

William Crawford: California savings and loan commissioner, 1985-present. 

Durwood Curiae: Director, Texas Savings and Loan League; later, Texas thrift 

Sam Daily: Associate of Mario Renda in his linked financing scams; Hawaii real 
estate broker. 

Morris "Moe" Dalitz: Reputed mob associate; owner Desert Inn Hotel and Casino 
and Sundance Hotel in Las Vegas; general partner La Costa resort. 

Dennis DeConcini: Democratic senator from Arizona; met with regulators on behalf 
of Lincoln Savings, Irvine, California. 

Anthony Delvecchio: Borrower at Flushing Federal Savings, New York; associate 
of Michael Rapp. 

Daniel W. DierdorfF: President, Sun Savings, San Diego, California. 

John Dioguardi: reputed to be a member of the Lucchese mob family; associate of 
Michael Hellerman. 

Don Dixon: Controlled Vernon Savings, Vernon, Texas. 

Frank J. Domingues: borrower with )ack Bona at San Marino Savings; owner South 
Bay Savings, Newport Beach, California. 

Edwin Edwards: Louisiana governor 1972-1980, 1984-1988. 

Frank Fahrenkopf: chairman Republican National Committee, 1982-1988. 

Robert Ferrante: Owner, Consolidated Savings Bank, Irvine, California. 

Ed Forde: chairman, San Marino Savings, San Marino, California. 

Lorenzo Formato: president. World Wide Ventures; associate of Michael Rapp. 

Jack Franks: southern California loan broker. 

Jake Gam: Republican senator from Utah; chairman, Senate Banking Committee; 
co-author, Garn-St Germain Act. 

Thomas Gaubert: Former head and major shareholder, Independent American Sav- 
ings, Irving, Texas; treasurer 1986 Democratic Congressional Campaign Committee. 

John Glenn: Democratic senator from Ohio; met with regulators on behalf of Lin- 
coln Savings, Irvine, California. 

xii ■ Dramatis Personae 

Henry Gonzalez: Democratic congressman from Texas; chairman House Banking 
Committee after St Germain was defeated for re-election in 1988. 

David Gorwitz: reputed mob associate; friend of Richard Binder who was a borrower 
at Centennial Savings. 

Camille Gravel: Louisiana attorney; represented Herman Beebe; close friend of judge 
Edmund Reggie. 

Edwin J. Gray: Chairman, FHLBB, 1983-1987. 

Roy Green: president FHLB Dallas, resigned 1987. 

Alan Greenspan: thrift consultant; chairman. Federal Reserve Board. 

Mary Grigsby: member FHLBB, 1984-1986. 

Beverly Haines: Executive vice president. Centennial Savings, Guemeville, Cali- 

Craig Hall: Dallas real estate syndicator. 

Erwin Hansen: President, Centennial Savings, Guemeville, California. 

J.B. Haralson: Owner, Ben Milam Savings, Cameron, Texas, and Mercurv' Savings, 
Witchita Falls, Texas; associate of George Aubin. 

Richmond Harper: member of the 1970s Rent-a-Bank scandal in Texas and a Ben 
Barnes associate. 

Michael Hellerman (aka Michael Rapp): Mob's stock broker; borrower. Flushing 
Federal Savings, New York; purchased Florida Center Bank with rubber check from 
Charles Bazarian. 

Lee Henkel: Brief member, FHLBB; associate of John Connally and Charles Keat- 

E. Morton Hopkins: owner. Commodore Savings in Dallas, partner with Mitchell 
Brown in First National Bank of Marin in San Rafael, California. 

Donald Hovde: member FHLBB, 1983-1986. 

Lawrence S. lorizzo: reputed mob associate and associate of Mario Renda. 

William Isaac: Chairman, FDIC, 1981-1985. 

Norman B. |enson: Las Vegas attorney; casino owner; borrower. Alliance Federal, 
Kenner, Louisiana; alleged member international drug smuggling ring. 

Charles Keating: Chairman, American Continental Corporation in Phoenix, parent 
company of Lincoln Savings, Irvine, California. 

|ohn Keilly: Las Vegas loan broker; associate of Norman B. Jenson, Wayne Newton, 
Frank Fahrenkopf; did 27 months in prison in 1970s in connection with a union 
bribery case. 

Dramatis Personae • xiii 

Carroll Kelly: owner with David Wylie, Continental Savings, Houston; associate of 
Herman K. Beebe. 

Murray Kessler: reputed mob associate; involved with a figure in the Texas Rent-a- 
Bank scandal in the 1970s. 

Adnan Khashoggi: Saudi Arabian middleman, associate of Mario Renda; borrower 
from Mainland Savings, Houston, Texas. 

Kenneth Kidwell: President, Eureka Federal Savings, San Carlos, California. 

Charles Knapp: Former head of Financial Corporation of America, parent company 
of American Savings, Stockton, California; the "Red Baron." 

Sig Kohnen: a senior officer of Charles Bazarian's CB Financial. 

John Lapaglia: loan broker; head of Falcon Financial, San Antonio, Texas. 

William Lemaster: President, Indian Springs State Bank, Kansas City. 

Woody Lemons: CEO, Vernon Savings. 

Donald E. Luna: associate of Herman K. Beebe and Carl Cardascia. 

Bruce Maffeo: Assistant U.S. attorney. Organized Crime Strike Force, Brooklyn, 
New York, on the First United Fund case. 

George Mallick: Fort Worth developer and friend of Speaker of the House Jim 

Michael Manning: Attorney; fee counsel, FDIC and FSLIC, on the First United 
Fund case. 

Ed McBimey: Chairman, Sunbelt Savings, Dallas. 

John McCain: Republican senator from Arizona; met with regulators on behalf of 
Lincoln Savings, Irvine, California. 

Ed Meese: U.S. Attorney General, 1985-1988. 

John Mmahat: CEO Gulf Federal Savings, Metarie, Louisiana. 

Donald P. Mangano: owner, Ramona Savings, Ramona, California. 

Scott Mann: chairman CreditBanc Savings, Austin, Texas. 

Carlos Marcello: reputed New Orleans Mafia boss. 

Ronald J. Martorelli: vice president. Flushing Federal Savings, Flushing, Queens, 
New York. 

Frederick Mascolo: borrower at Acadia Savings, Crowley, Louisiana; purchased 
Poconos property from Rizzo and Delvecchio. 

Harvey McLean: director, Paris Savings, Paris, Texas; owner. Palmer National Bank, 
Washington, D.C. 

xiv • Dramatis Personae 

Walter Mitchell, Jr.: Redondo Beach, California, city councilman and associate of 
Robert Ferrante. 

Ed Mittlestet: president, Charles Bazarian's CB Financial. 

John L. Molinaro: owner, Ramona Savings, Ramona, California. 

Patrick Murphy: FBI special agent on the Centennial Savings case. 

John Napoli, Jr.: convicted of bank fraud in connection with his dealings at Aurora 
Bank in Denver; an associate of Michael Rapp. 

Tom Nevis: borrowed over $100 million from savings and loans; convicted of bank 
fraud at State Savings of Corvallis, Oregon in 1989. 

William O'Connell: President, U.S. League of Savings Institutions. 

Guy Olano: Chairman, Alliance Federal Savings, Kenner, Louisiana. 

J. William Oldenburg: San Francisco loan broker; owner. State Savings, Salt Lake 

Michael Patriarca: Director of Agency Group. FHLB San Francisco. 

Leonard Pelullo: chairman, Royale Group Ltd; purchased Atlantic City Dunes in 

Gene Phillips: chairman, Southmark Corp. 

Salvatore Piga: reputed mob associate and friend of Mario Renda. 

Robert Posen: thrift attorney, associate of loan broker John Lapaglia. 

Richard Pratt: FHLBB chairman, 1981-1983. 

Albert Prevot: PVench businessman from Houston whose testimony led to the in- 
dictment of Herman K. Beebe. 

G. Wayne Reeder: Southern California developer with connections to Southmark, 
Herman Beebe, San Marino Savings, others. 

Donald Regan: CEO and chairman of the board, Merrill Lynch, 1975-1981; trea- 
sury secretan, 1981-1985; White House chief of staff 1985-1987. 

Edmund Reggie: Louisiana judge; founder and director, .Acadia Savings, Crowley, 
Louisiana: associate of Herman Beebe. 

Lionel Reifler: Associate of Michael Rapp; borrower at Acadia Savings in Crowley, 

Mario Renda: Deposit broker; owner First United Fund, Garden City, New York. 

John Riddle: Vernon Savings borrower. 

Don Riegle: Democratic senator from Michigan; met with regulators on behalf of 
Lincoln Savings, Irvine, California; later returned contributions from Lincoln. 

Dramatis Personae • xv 

Jilly Rizzo: Borrower. Flushing Federal Savings; assoeiate of Michael Rapp, and 
elose friend and bodyguard to Frank Sinatra. 

Peter Robinson: Assistant U.S. attorney, Santa Rosa, California, on the Centennial 
Savings case. 

Stuart Root: head, FSLIC. 

Heinrich Rupp: Borrower. Aurora Bank. Denver; claimed to be CIA contract pilot; 
associate of Michael Rapp. 

Anthony Russo: Vice president, hidian Springs State Bank, Kansas City. 

Richard Sanchez: supervisor. FHLB San Francisco. 

Nicholaas Sandmann: Dutch investor; borrower and stockholder. Centennial Sav- 
ings, Guerneville, California. 

Philip B. Schwab: Owner, Cuyahoga Wrecking Company, Great Neck, New York; 
owner. Players Casino, Reno. 

Martin Schwimmer: Financial advisor. First United Fund, Garden City, New York. 

Joe Selby: Chief supervisory agent, FHLB Dallas. 

Siddharth Shah: Executive vice president. Centennial Savings, Guerneville, Cali- 

Morris Shenker: Owner, Dunes Hotel and Casino, Las Vegas, until 1984; former 
attorney for Teamster boss Jimmy Hoffa. 

William Smith: associate of Michael Rapp; claimed to be former CIA agent. 

Leif and Jay Soderling: owners. Golden Pacific Savings, Windsor, California. 

Rosemary Stewart: head, enforcement division, FHLBB. 

Femand St Germain: Democratic congressman from Rhode Island; chairman. House 
Banking Committee; co-author, Garn-St Germain Act. 

David Stockman: director. Office of Management and Budget, 1981-1985. 

Larry Taggart: California S&L commissioner 1983-1985. 

R.B. Tanner: founder, Vernon Savings, Vernon, Texas. 

Laurence B. Vineyard, Jr.: attorney for Brownfieid Savings, Brownfield, Texas; 
owner with Tyrell Barker of Key Savings, Englewood, Colorado. 

Paul Volcker: chairman. Federal Reserve Board, 1979-1987. 

M. Danny Wall: Sen. Jake Garn's aide until 1985; became FHLBB chairman in 


Bruce West: Vernon Savings borrower. 

xvi • Dramatis Personae 

Chuck Wilson: owner, Sandia Savings, Albuquerque, New Mexico. 

Franklin Winkler: Associate with Mario Renda in linked financing scams; Hawaii 
real estate develof)er. 

V. Leslie Winkler: International con man and associate of Mario Renda. 

Jarrett Woods: owner. Western Savings, Dallas. 

Jim Wright: Democratic congressman from Texas; became Speaker of the House 
January 1987. 

E)avid Wylie: owner with Carroll Kelly, Continental Savings, Houston; associate of 
Herman K. Beebe. 

Al Yarbrow: Beverly Hills loan broker. 


Original Sin 

President Ronald Reagan stepped through the tall French doors of the White 
House Oval Office into the bright sunlight of a lovely fall morning. Whispers 
and nudges rippled through the crowd, and a hush fell over the Rose Garden. 
A squad of Secret Service agents melted into the audience as Reagan, smiling 
broadly, strode across the lawn to the podium. 

The president stood at ease for a moment and looked out over the assembled 
guests, beaming with pride and satisfaction. He had promised the American 
people that he would get government off their backs, that he would deregulate 
the private sector. This day, October 15, 1982, less than two years into his 
presidency, he had invited 200 people to witness the signing of one of his 
administration's major pieces of deregulation legislation. 

Reagan told the audience of savings and loan executives, bankers, congress- 
men, and journalists that they were there to take a major step toward the de- 
regulation of America's financial institutions. He was about to sign, he said, the 
Garn-St Germain Act of 1982, which would cut savings and loans loose from 
the tight girdle of old-fashioned, restrictive federal regulations. For 50 years 
American families had relied on savings and loans to finance their homes, but 
outmoded regulations left over from the era of the Great Depression, Reagan 
believed, were preventing thrifts from competing in the complex, sophi.sticated 
financial marketplace of the 1980s. The Garn-St Germain bill would fix all that, 
he promised. 

At the conclusion of his remarks, and following enthusiastic applause, Rea- 
gan took his seat at a table surrounded by the bill's proud political parents. He 
flashed a broad smile for the cameras and launched into the signing process. 
With each sweep of a souvenir pen, thrift regulations crumbled. It was an 
exhilarating moment for Ronald Reagan. The bill was "the most important 


legislation for financial institutions in 50 years," he said. It would mean more 
housing, more jobs and growth for the economy. 

"All in all" — he beamed — "I think we've hit the jackpot." 

Less than four years later, at the lavish Dunes Hotel and Casino in Las 
Vegas, Ronald Reagan's words could well have served as the chorus to Ed 
McBirney's company song. 

Ed McBirney was the fun-loving 33-year-old chairman of Sunbelt Savings 
and Loan, one of Dallas's largest S&Ls with nearly $3 billion in assets. He was 
playing host at one of his periodic parties in his plush penthouse suite at the 
Las Vegas Dunes. One of the guests later described the party: McBirnc> smiled 
slyly as he surveyed his guests. Slouched on the floor against a couch, he puffed 
on a large cigar as Sunbelt executives and customers, whom he had flown from 
Dallas to Las Vegas on a private 727 jet, mingled and chatted, enjoying predinner 
cocktails and hors d'oeuvres on Sunbelt's tab. McBirney seemed to enjoy living 
up to his reputation as an outrageous swinger who conducted business deals 
between, and during, parties, and entertainment had been secretly arranged 
tonight that promised to be . . . interesting. 

He glanced toward the door as it opened. Four attractive, well-dressed women 
entered the room full of men. The buzz of conversation paused as McBirney's 
guests noticed the new arrivals. They watched expectantly, curiously, as the 
women smiled seductively and drifted quietly to prominent positions in the room. 
Suddenly, without explanation, they began to undress. 

The savings and loan guests, well aware of McBirney's reputation, were only 
momentarily surprised. Then they settled back to enjoy the show. They did 
assume, however, that once the women were naked, the entertainment would 
end. They were wrong. When the women finished undressing they mo\ed toward 
the center of the room and engaged in an enthusiastic lesbian romp. The all- 
male audience did some embarrassed shuffling, but for the most part they went 
along for the ride. After the lesbian routine the girls separated and moved among 
the guests, many of whom were still frozen in amazement. Targeting the older 
members of the audience, the women began performing oral sex on them while 
McBirney, sitting on the floor, grinned widely and puffed on his cigar. 

McBirney was skillfully riding a cresting wave of power, and he certainly 
must have felt like he had hit the jackpot, though it was not quite the one 
President Reagan had had in mind that morning in the Rose Garden. But just 
four months after the March 1986 party in Las Vegas, McBirney would be forced 
to resign from Sunbelt, and he would leave the institution hopelessly insolvent. 
When the dust finally settled regulators would say Sunbelt's cash drawer was 
$500 million short. Worse yet, the cost of playing out the thrift's losing hand 
would be $1.7 billion. Quite a jackpot. 

McBirney, and dozens like him, were a new breed of savings and loan 
executive that had sprung like weeds out of the rich soil of the October 1982 Rose 

Introduction: Original Sin • 3 

Garden ceremony. At first no one quite knew what to make of these flamboyant 
new "entrepreneurs." They were very different from the old traditional thrift 
officers, but wasn't that precisely the point of deregulating the thrift industry — 
to attract the best and brightest from America's private sector and give them free 
rein to work capitalism's magic on an industry clogged with dead wood? Wall 
Street's wunderkind, arbitrager/financier Ivan F. Boesky, acquired a small upstate 
New York thrift. Then-Vice President George Bush's son Neil became director 
of Silverado Savings in Denver. New York Governor Mario Cuomo's son Andrew 
tried to purchase Financial Security Savings in Delray Beach, Florida. Former 
Governor of Illinois Dan Walker acquired First American Savings in Oak Brook, 
Illinois. Surely, people thought, if men of such stature wanted to own savings 
and loans, the industry must be headed in the right direction.' 

But only 18 months after the Rose Garden signing, Edwin Gray, chairman 
of the Federal Home Loan Bank Board (FHLBB),- discovered something had 
gone very wrong. On March 14, 1984, he received in the morning dispatch a 
classified report and videotape from the Dallas Federal Home Loan Bank. Gray 
summoned fellow Bank Board members Mary Grigsby and Donald I. Hovde to 
a darkened meeting room on the sixth floor of the Bank Board building, just 
down the block from the White House, to view the tape. Gray, in his late forties, 
a solid but tired-looking man with graying hair, sat at the head of the conference 
table. Microphones recorded the moment for history. In the dimly lit room, a 
videotape began to roll. 

Gray, Grigsby, and Hovde watched in rapt horror. The narrator, a Dallas 
appraiser, appeared to be in the passenger seat of a car driving along Interstate 
30 on the distant outskirts of east Dallas. The camera panned slowly from side 
to side, catching in sickening detail the carrion of dead savings and loan deals: 
thousands of condominium units financed by Empire Savings and Loan of 
Mesquite, Texas. The condominiums stretched as far as the camera could see, 
in two- and three-floor clusters, maybe 1 5 units per building. They were separated 
by stretches of arid, flat land. Many were only half-finished shells. Most were 
abandoned, left to the ravages of the hot Texas sun. Like a documentary film, 
the camera zoomed in on building materials stacked rotting in the desert dust. 
Loose wiring and shreds of insulation swayed in the warm, dead, quiet air. 
Siding had warped, concrete cracked, windows broken. In many cases only the 
concrete slab foundations remained — "Martian landing pads," a U.S. attorney 
would later call them. 

"I sat in that board meeting," Gray said later, "and I was so shocked and 
stunned at what I was seeing that it had a profound effect on me. It was like 
watching a Triple X movie. I was sick after watching it. I could not believe that 
anything so bad could have happened." 

Empire Savings and Loan had rocketed gleefully into the newly deregulated 
thrift universe in apparent disregard of the ethical and legal implications of its 


wild ways, growing seventeen-fold in two years. Later the Federal Savings and 
Loan Insurance Corporation (FSLIC) would charge that Empire's officers had 
"sold" land back and forth with associates, to make it look like the land was 
increasing in value, in order to justify huge loans from Empire Savings for the 
condominium projects along the 1-30 corridor. They seemed to have completely 
ignored cautions normally taken by prudent thrifts to ensure the safety and 
security of money entrusted to them by their depositors. And now the savings 
and loan was not only broke but deeply in the red. 

The Bank Board closed Empire Savings that very day and about a year later 
the federal government would file both civil and criminal charges against over 
100 companies and individuals involved in Empire's collapse.' In the end the 
Empire case alone would cost the FSLIC"' about $300 million. But Empire, 
costly as it was, represented just the first small hint of the financial holocaust 
to come. Deregulation of savings and loans sparked a period of waste and cor- 
ruption, excess and debauchery the likes of which the nation had not seen since 
the roaring twenties. The ink wasn't dry on the Garn-St Germain legislation, 
deregulating the thrift industry, before high-stakes investors, swindlers, and mobs- 
ters lined up to loot S&Ls. They immediately seized the opportunity created by 
careless deregulation of thrifts and gambled, stole, and embezzled away billions 
in an orgy of greed and excess. 

The result was the biggest financial disaster since the Great Depression and 
the biggest heist in history. Lens of billions of dollars were siphoned out of 
federally insured institutions. Following Empire Savings thrift after thrift col- 
lapsed, the victims of incompetent management, poor or nonexistent supervision, 
insider abuse, and, most important, outright fraud.' By the time the problem 
was discovered, there was little left for the FSLIC to do but pay back the depositors 
whose money the thrifts had squandered. In just tv\o short years the FSLIC 
insurance fund paid out the equivalent of all its income for the past 52 years. 

In early 1987 thrift regulators said it would cost the FSLIC $15 billion to 
close all insolvent thrifts. (Out of about 3,200 thrifts, at least 500 were insoKcnt 
and another 500 were nearly insolvent.) By the end of the year that estimate 
had jumped to $22.7 billion. In mid-1988 regulators said the cost could go to 
$35 billion. In October they upped the figure to $50 billion. But at the same 
time the General Accounting Office*" was saying the shortfall was more like $60 
billion. In late 1988 experts' said costs were increasing by as much as $55 million 
a day and floated total loss figures of $100 billion or more. When President 
George Bush announced his S&'L bailout plan in Februar\ 1989, analy.sts put 
the cost at $1 57 billion to $205 billion for the first ten >ears and a total of $360 
billion over three decades. They were conceding that the cost of bailing out the 
S&Ls would be more than the entire federal deficit. As c\cr\one in Washington 
and the thrift industry (except President Reagan, who went eight years without 
mentioning the problem) haggled over just how many billions might be missing, 

Introduction: Original Sin • 5 

the late Senator Everett Dirkson's favorite Wasliiiigton joke came to mind: "A 
billion dollars here and a billion there and pretty soon we're talking real money." 
The halls of Congress began to hear the first quiet whispers of a taxpayer bailout. 
The meltdown of the savings and loan industry was a national scandal, a 
scandal that left virtually no player untouched or unsullied. It was above all a 
story of failure — failure of politicians, failure of regulators, failure of the Justice 
Department and failure of the federal courts. But even as the crisis was being 
unraveled and the alarm sounded, thrift executives and their customers continued 
to revel in life in the fast lane, surrounded by their women and their mansions, 
their Lear jets and their Rolls-Royces. And billions of dollars drifted off into the 
ozone never to be seen again. Of the missing money, as much as half had been 
stolen outright. Yet few of the hit-and-run artists who infiltrated the thrift industry 
went to jail and little of the money was recovered. In short, these inside jobs 
not only paid but paid very well indeed. And the savings and loan industry as 
Americans had known it for 50 years teetered on the edge of collapse. 

Coauthors Steve Pizzo and Mary Fricker were jarred to attention by thrift 
deregulation's fallout when tiny, conservative Centennial Savings and Loan in 
their rural Northern California hometown of Guerneville began acting strangely 
in December 1982 (two months after the signing of the Garn-St Germain Act) 
and announced it was going to pay $ 1 3 million cash for a construction company. 
Pizzo was editor of the Guerneville weekly, the Russian River News, and Fricker 
was news editor. Pizzo wrote a news analysis highly critical of Centennial's plan 
to spend seven times its net worth' on a construction company, and he began 
aggressive coverage of a succession of strange happenings at Centennial Savings 
and Loan. 

Centennial officers suddenly were awash with money. Their names popped 
up in complex real estate transactions documented at the county recorder's office. 
Out-of-town visitors from places like Holland, Las Vegas, and Boston mysteri- 
ously came and went, taking money with them. Still the thrift's financial state- 
ments recorded phenomenal growth. And the small-town rumor mill geared up 
to churn out dozens of explanations for this bizarre behavior. In the Russian 
River News, Pizzo began asking some fairly obvious questions of the Centennial 
officers: "Where is all this money coming from? " "Who are you lending it to, 
and why?" "How can you justify these extravagant salaries, benefits, perks, planes, 
luxury cars, boats, and trips?" Was this, Pizzo asked, the proper role for a savings 
and loan, heretofore the most conservative, predictable, and reliable of all Amer- 
ican financial institutions? 

Pizzo's journalistic probings infuriated Frv Hansen, the president of Cen- 
tennial Savings, and he exploded. He dispatched his assistant to complain to 
the paper's publisher. Periodically he threatened that tellers at Centennial would 


monitor withdrawals, and if they were substantial, he would sue the News for 
causing a run on the thrift. Drunk in a local bar one night, Hansen told Pizzo's 
business partner, Scott Kersnar, "You tell your partner he better stop sticking 
his nose where it doesn't belong or I'll do to him what 1 did to that San Diego 
reporter on that stock manipulation deal." Pizzo had no idea what had happx^ned 
to the San Diego reporter, but he took the warning seriously because he had 
already discovered that some of those customers buzzing around Centennial's 
loan window had organized crime backgrounds. 

For four years Pizzo pursued the Centennial Savings and Loan story, and 
gradually his Russian River News articles about Centennial Savings found their 
way outside tiny Guerneville. They circulated quietly at the Federal Home Loan 
Bank in San Francisco and Washington and at the Justice Department. In late 
1985 Centennial collapsed — $165 million was missing. 

A few months later Pizzo ran a full-page story entitled "Bust-Out," which 
explained the decades-old mob scam of gaining control of legitimate businesses 
and then looting, gutting, and abandoning them. Pointing to characters he had 
discovered in association with Hansen at Centennial, Pizzo raised the possibility 
that Centennial might have been a victim of such an operation. After the article 
appeared FBI agents quietly working on the Centennial case took Pizzo aside 
and behind closed doors told him they personally believed his premise was 

Three thousand miles away, in New York City, Stan Strachan, editor of a 
trade publication called the National Thrift News,'' described by USA Today as 
"the Bible of the thrift industry," heard of Pizzo's pursuit of Centennial. He 
called associate editor Paul Muolo into his office and told him to go to California 
to find out if there was a story in all that alleged skullduggery. Two days later 
Muolo sat in Pizzo's small, cluttered Cuerneville office and wondered if Pizzo 
was actually onto a story or was just a nut — his bust-out theory left little room 
for neutral ground. Was it even remotely possible that deregulation had allowed 
organized crime and their legions a foothold in the thrift industry? Muolo had 
to admit that thrift failures suddenly were multiplying exponentially around the 
country. The National Thrift News was reporting on the collapses every week. 
Something frightening, and not at all understood, was going on, and Pizzo's 
profile of Centennial's collapse was practically a template that could be laid over 
several others Muolo was writing about for the National Thrift News. Pizza 
complained that he had tried to alert regulators about Centennial in one way 
or another for months, but they had ignored him. The implications of Pizzo's 
suspicions were enormous. Muolo went back to New '^'ork to sort out what he 
had heard. 

A week later Mary Fricker called Pizzo. She had left the News and now 
worked for a daily newspaper nearby, but she had followed Pizzo's Centennial 

Introduction: Original Sin • 7 

stories and had for a year been working on a related investigation of her own. 
Slie wanted to sit down and go tlirough his files. Fizzo's Centennial "file" was 
a big, disorderly cardboard box stuffed with doeuments and notes. For a day she 
dug through the box and weighed tiie evidence that more had been going on at 
Centennial than met the eye. 

In December 1986 the three of us agreed that whatever was going on at 
thrifts was too big a story for any one writer to get his or her arms around alone. 
We decided to cooperate in a thorough investigation of savings and loan failures. 
We were still running on hunches at that point, but we had enough information 
to sense that we were on the threshold of what could be the story of a lifetime. 
And so we began sorting through Hunipty Dumpty's eggshells scattered coast to 
coast. While industrv' professionals told us time and again that the growing 
number of thrift failures were simply the result of natural selection following 
deregulation, we steadily amassed evidence that suggested otherwise — Humpty 
Dumpt>- had been pushed. 

By the end of 1988, Centennial Savings and 581 other thrift institutions 
were dead and another 800 were in regulatory intensive care and might not 
sunive. Some of the people who had run those institutions were also dead — 
garroted, shot, or victims of suspicious accidents. And still the looting continued. 
In fact, it threatened to get worse as, incredibly. Congress made plans to dere- 
gulate banks. The multibillion-dollar problem created by the insolvency of over 
500 of the 3,200 federally insured S&Ls, and the near insolvency of over 500 
more, mind-boggling as it was, would be peanuts compared to an equivalent 
problem among the 14,000 federally insured banks. 

We were driven in our investigation by evidence that much of the looting 
in progress at many of the savings and loans around the nation was in fact not 
the work of isolated individuals but instead was the result of some kind of network 
that was sucking millions of dollars from thrifts through a purposeful and co- 
ordinated system of fraud. We saw evidence that classic "bust-outs" were in 
progress at thrifts everywhere we looked. At each step of our investigation our 
suspicions grew because, of the dozens of savings and loans we investigated, we 
never once examined a thrift — no matterhow random thechoice — without finding 
someone there whom we already knew from another failed S&L. Yet there was 
no coordinated national investigation into the causes of the savings and loan 
crisis. Individual reporters and individual FBI agents around the country were 
peeking away at their own local thrift failures, but no one seemed to be pursuing 
the common links between geographically disparate thrift failures. Pizzo's sus- 
picions since 1984 that there was a connection behind much of the looting had 
met with scoffs of disbelief at the highest levels of the Justice Department and 
the Federal Home Loan Bank Board in Washington. If some group or groups 
had successfully orchestrated the theft of tens of billions of dollars from financial 


institutions, in broad daylight, without firing a shot, and had gotten away with 
it without raising the Justice Department's suspicions, the implications for the 
country were grim. 

We beheved we were in a race to identify the players in this massive looting 
operation. In the process we uncovered mobsters, arms dealers, drug money 
launderers, and the most amazing and unlikely cast of wheeler-dealers that ever 
prowled the halls of financial institutions. The damage they did to this country's 
thrift industry will be with us well into the next century. It will significantly add 
to our national debt and will cost every taxpayer in the country another $2,000 
in taxes over the next ten years. The 150-year-old thrift industry itself may not 


A Short History Lesson 

TTie deregulation of savings and loans in the early 1980s was prompted by a 
series of new problems that suddenly beset an industry that had been a stable 
member of the American financial community for 1 50 years. The first savings 
and loan in the United States — then called a "building and loan" and tailored 
after building and loan societies in England — was the Oxford Provident Building 
Association, formed in 1831 in Frankford, Pennsylvania (now part of Philadel- 
phia). Savings and loans filled a vacuum created by banks, which were primarily 
interested in making consumer and commercial loans, not home loans. 

There were 12,000 savings and loans in operation by the 1920s but they 
were not part of an integrated industry. Each state regulated — or failed to 
regulate — its own S&Ls, and regulations differed widely from state to state. At 
the same time competition between thrifts and banks was creating friction be- 
tween the two kinds of financial institutions. Congress had created the Federal 
Reserve System for banks in 1913, thereby giving banks an aura of federal control 
and safety that S&Ls did not enjoy. ' 

In this environment a movement began to initiate federal regulation of thrifts, 
but before Congress could take concrete action the stock market crashed in 1929 
and the Great Depression followed.- Over 1,700 thrifts failed and depositors lost 
$200 million in savings. Thrifts were desperate for help, and their lobby, the 
U.S. League of Local Building and Loan Associations (later to become the U.S. 
League of Savings Associations, the nation's largest and most powerful thrift 
trade association), urged the federal government to come to the industry's aid. 

By then thrifts had become a critical element in the national economic 
machinery and their troubles could not be easily ignored. President Herbert 
Hoover responded to industry pressure and signed the Federal Home Loan Bank 
Act in 1932, creating a federal S&L pyramid with the Federal Home Loan Bank 


Board (FHLBB) in Washington at the top, 12 semi-independent regional federal 
home loan banks (FHLBs) beneath it, and indi\idual savings and loans at the 
base of the pyramid/' Thrifts were gi\en the option of being state or federally 
chartered, but those wiio chose a federal charter had to operate under strict 
federal regulations and examiners were sent to make sure they did. 

Many Americans had lost their life sa\ings during the "bank holidays" of 
the Depression and they were slow to put their money back into banks and 
thrifts. To encourage them to fund their neighborhood sa\ings and loans with 
their meager savings. Congress decided the industry needed to insure its depos- 
itors' money against loss. In 1934 Congress established the Federal Sasings and 
Loan Insurance Corporation (FSLIC),'' which insured deposits up to $5,000 — 
big money in those days. The FSLIC (pronounced Fizz-Lick by industry insiders) 
insurance system was funded not by the government but by assessments made 
on its member thrifts.^ 

In this new and improved federal thrift system, local insured deposits were 
loaned out to local home buyers, who then became solid members of the com- 
munity, and new depositors — a business cycle that worked beautifully for 50 
years. Savings and loans occupied a special place in America, making home 
ownership affordable for the emerging middle class primarily through ^0-year, 
fixed-rate mortgages. Thrifts provided the fuel for the home-building engine that 
for almost half a cenhiry acted as the fountainhead of America's dynamic do- 
mestic economy. Headlines reading "Housing Starts Decline" always predated 
recessions, and "Spurt in Housing Starts" always announced the recovery. The 
American life-style centered around the single-family home fimded largely by 
the little neighborhood savings and loan, a system immortalized in the classic 
Frank Capra film It's a Wonderful Life. In the film, jimmy Stewart played 
George Bailey, the head of a sleepy little hometown thrift that lent money to 
residents of the mythical Bedford Falls. Insiders called those days the ?-6-? days, 
when savings and loan executives borrowed (from depositors) at ? percent, loaned 
(to home buyers) at 6 percent, and were in a golf cart by 3 p.m. 

The first real trouble for this comfortable savings and loan world appeared 
during a mildly inflationary period in the 1960s when Congress worried over 
the increasing cost of homes. Since the Second World War affordable housing 
had become an American birthright. Congress' solution to rising home prices 
was to put a cap on the interest rate that thrifts could pay on deposits placed 
with them. Congress' reasoning was that if S&'Ls didn't have to pay too much 
for deposits, they wouldn't have to charge too much to the homeowners who 
borrowed from them. 

It was here that Congress' tinkering with the thrift system began going terribly 

A Short History Lesson '11 

wrong. The interest rate cap, designed to help tlie housing sector, became a 
serious handicap for thrifts in the 1970s. The wildfire of inflation that then swept 
the economy put savings and loans in a bind*" because by 1979 inflation was 
running at 13.3 percent but thrifts were limited to paying only 5.^ percent on 
deposits, and depositors were not willing to invest their money at such low rates." 
To compound the thrifts' problems, in the 1970s wily entrepreneurs introduced 
an entirely new product, the money market fund, which paid higher interest 
rates.'' Other companies — like Sears, American Express, and Merrill Lynch — 
saw the possibilities and also developed investments to attract savers' deposits. 
This increased competition was aided by new technologies. A twenty-first-century 
rail of satellite dishes and fiber optics enabled depositors to place their savings 
nationwide, even worldwide. They were no longer confined to their community 
bank or thrift in their search for a better return on their savings.'' Thrifts hem- 
orrhaged from a steady outflow of deposits. By 1982, for example, there was 
over $200 billion in money market funds. 

The outflow from thrifts quickly reached crisis proportions. In 1972 the 
nation's savings and loans had a combined worth of $16.7 billion. By 1980 that 
figure had plummeted to a negative net worth of $17.5 billion, and 85 percent 
of savings and loans were losing money. Regulators began to warn that if nothing 
were done, all thrifts would collapse by the end of 1986. 

Throughout the years, when savings and loans experienced financial diffi- 
culties, federal regulators had traditionally added more layers of regulation. But 
they could not regulate away the effects of inflation, so in the mid-1970s they 
decided the opposite approach might work— deregulation.'" In 1980 Congress 
finally passed its first thrift deregulation bill, the Depository Institutions Dereg- 
ulation and Monetary Control Act, designed to phase out interest rate controls 
on deposits placed with banks and S&Ls. At the same time Congress increased 
the FSLIC insurance coverage on deposits from $40,000 per account to 
$100,000." Regulators later said this may have been the most costly mistake 
made in deregulating the thrift industry. Suddenly thrifts could attract $100,000 
blocks of (insured) money with which they could wheel and deal at no risk to 
the depositor or to the thrift officers. Ironically, this increase in FSLIC coverage 
was made with little debate and no congressional hearings. While legislators 
were hammering out the details of the Depository Institutions Deregulation and 
Monetary Control Act in a late-night session on Capitol Hill, Glen Troop, chief 
Washington lobbyist for the powerful U.S. League of Savings Institutions, and 
an associate convinced congressmen to make the increase.'^ 

"It was almost an afterthought," a House staffer later told a reporter." 
Deregulation of interest rates by the Depository Institutions Deregulation 


and Monetary Control Act was a mixed blessing for thrifts. It did increase their 
deposits but it created a deadly profit squeeze in the process. As the cost of 
deposits increased, the spread between the price thrifts paid for the short-term 
deposits and the rate thrifts had charged for the long-term loans they held (some 
of which they might have made 30 years earlier) increased. Thrifts were paying 
significantly more interest on deposits than they were receiving on old loans. In 
the first half of 1982 S&Ls lost a record $3.3 billion. Thrifts from around the 
country found their balance sheets bleeding a sea of red ink, and lobbyists from 
the U.S. League of Savings histitutions and other trade organizations begged 
Congress to throw them another life preserver. The result this time was the most 
significant thrift legislation in 50 years, the Garn-St. Germain Depository In- 
stitutions Act of 1982, which Ronald Reagan signed in the Rose Garden cere- 
mony in October 1982. Garn-St Germain went beyond simple tinkering. It was 
a complex piece of legislation that changed the face of an entire industry with 
a pen stroke. Two key elements were: 

S&Ls would be allowed to offer money market funds,''' free from with- 
drawal penalties or interest rate regulation. 

Thrifts could invest up to 40 percent'^ of their assets in nonresidential 
real estate lending. Commercial lending was much riskier than home 
lending, but the potential returns were higher. This provision made 
thrifts vulnerable to enormous losses.'* 

Also in 1982, in a move designed to reassure worried depositors who heard 
about the thrift industry's problems, Congress passed a Joint Current Resolution 
that placed the full faith and credit of the U.S. government behind the FSLIC. '^ 

Thrift regulators also got the deregulation fever: 

To combat the dying off of S&Ls, a regulation requiring a thrift to have 
400 stockholders with no one owning more than 25 percent of the stock 
was changed in April 1982 to allow a single shareholder to own a thrift. 
This did result in the start-up of many new savings and loans, but it 
completely changed the character of the industry. Approval for a new 
thrift charter had traditionally been based on a clear community need 
and widespread local support for the thrift. Now the thrust was to attract 
innovative, visionary entrepreneurs to be the saviors of the thrift industry. 
What the industry got was a rush of brash, new owners with no other 
stockholders to buffer the S&L's well-being from the controlling owner's 
ambition, bad judgment, or greed.'* 

To make it even easier for an entrepreneur to purchase a thrift, regulators 
allowed buyers to start (capitalize) their thrift with land or other "non- 

A Short History Lesson '13 

cash" assets rather than inoiicy. (This prcnision was a boon to land 
developers who had extra land lying around that they had not been able 
to develop.) 

To encourage more loan business for savings and loans, regulators said 
thrifts could stop requiring traditional down payments from borrowers. 
Instead, thrifts could provide 100 percent financing, with the borrower 
not having a dime of his own money in the deal.'** 

Thrifts were permitted to make real estate loans anywhere.'" They had 
until now been required to loan on property located in their own market 
area, with an emphasis on community home building and ownership. 
But with this new regulation (which was intended to encourage a freer 
flow of funds from cash-rich to cash-poor areas and to increase loan 
opportunities for thrifts), thrifts were allowed to loan on property too far 
from home to monitor properly. 

On top of these revolutionary changes, owners of troubled thrifts began 
stretching already liberal accounting rules — with regulators' blessings — in order 
to squeeze their balance sheets into compliance. (Traditional accountants termed 
the liberalized thrift accounting methods "voodoo accounting.") For example, 
"goodwill" — defined as customer loyalty, market share, and other intangible 
"warm fuzzies ' — accounted for over 40 percent of the thrift industry's net worth 
by 1986. 

In all these ways — Congress passing legislation and regulators easing regu- 
lations and accounting standards — the federal thrift industry was systematically 
deregulated between 1980 and 1983. And for a while it looked like deregulation 
was working. In 1983 and 1984 the thrift industry appeared to grow by $300 
billion. Empire Savings, for example, had assets of only $20,7 million in 1982, 
but by 1984 it recorded assets of $320 million. George Bailey's little sleepy 
building and loan became a powerful money lending/development conglomerate 
that could make loans on, or even own, hotels, shopping malls, mushroom and 
windmill farms, tanning beds, Arabian horses, Wendy restaurants, and hot-tub 
spas — or invest in junk bonds and the futures markets. The sky was the limit 
and it could all be done with federally insured deposits.-' 

Unfortunately, many of the "entrepreneurs" attracted by these changes were 
actually con men intent upon draining as much money from the system as they 
could and then moving on. Simply put. Congress and Bank Board officials failed 
to add into the deregulation equation almost everything mankind has learned 
about human nature since the dawn of recorded history. Greed, avarice, am- 
bition, and ego dictate that some things in the social order just can't be left on 


the honor system, and at tlie top of that list is the care and feeding of other 
people's money. 

One former swindler, speaking to us from Fort Leavenworth federal peni- 
tentiary, where he was serving time for loan fraud, said his compatriots knew 
immediately what deregulation could mean to them. Imagine how they felt, he 
recalled, when "they realized they could have access to all the money they ever 

It's not hard to understand why savings and loans in the 1980s became known 
as "money machines." As one regulator remarked years later, "They didn't 
deregulate the industry, they unregulated it." 

Perhaps conditions could still have been kept under control, in spite of 
deregulation, if the examiners responsible for watching over savings and loans 
had done their job. So where was that diligent cadre of solemn bank examiners 
who had once traveled the country making certain that bankers stayed honest? 
Well, first of all, there were a lot fewer of them. The philosophy of the Reagan 
administration was that deregulation meant fewer regulators and examiners, so 
their number was cut. States, too, cut their supervision staffs. Turnover by 1984 
was running at 16 percent. Those examiners who were left were simply out- 
gunned, overworked, undertrained, underpaid," and ill-equipped to face down 
the new breed of banker attracted by deregulation. Each FSLIC employee was 
responsible for watching $18.7 million in assets, about four times the $4.7 million 
in assets watched by each'employee of the FDIC, which insured banks. As the 
industry deregulated, inspectors accustomed to examining nearly identical sets 
of books at each thrift, books based on simple 30-year home mortgages, suddenly 
were expected to be able to follow the intricate machinations of highly speculative 
finance. Examining a $20,000 loan on a home was a far cry from trying to judge 
the quality or prudence of a $20 million loan on a shopping center or a multitiered 
master limited partnership. 

It wasn't long before thrift failures rippled across the nation like one of those 
elaborate displays of dominoes that are erected and then destroyed for the Guin- 
ness Book of World Records. But the destruction didn't all happen in a day or a 
week or a month. It was four years in the making, and as we followed it we 
often asked ourselves the same question that Charles Bazarian, one of the bor- 
rowers convicted of fraud, demanded of us: 

This all didn't happen just yesterday. This happened over a long jjeriod of 
time. So where were the regulators, huh? They like to run around now, 
acting like they just discovered all this. Where were they when it was going 
on? Where were the goddamn regulators then? 

A Short History Lesson '15 

Wlicrc. indeed, were the regulators-' wliile thrifts were being looted? During 
our investigation we got ver)' Httle in the way of answers to that question. 
Spokesmen at the FHLBB either flatly refused to discuss thrift failures or they 
lied about them. In 198^ they told us there was no problem. Then later, when 
the trouble burst into the open, they lied to us about the size of the problem. 
Then they lied to us about the causes of the problem. There was no fraud, no 
organized crime involvement — it was the economy's fault, they said. Then they 
threw a blanket of secrecy over the solutions they said they had in mind. 

In the thrift industry itself, trade groups like the powerful U.S. League of 
Savings Institutions worked overtime during the years following deregulation to 
make sure the industry's dirty little secret never got out. They feared that if the 
public learned that some people were using deregulation to loot thrifts, they 
would demand re-regulation. 

It was only after we were well along in our investigation, and had cultivated 
solid sources within the Justice Department and the law firms working for the 
FSLIC, that we began to learn just why everyone was so afraid to talk. If what 
we saw at crooked thrifts had concerned us, nothing had prepared us for the 
abuses of power we found in Washington. But we also found courage, and we 
found the story of a lonely and painful passage for a most unlikely man — Edwin 
Gray. U.S. League members had talked Gray into becoming chairman of the 
FHLBB. When he took office, in May of 1983, he assumed control of a regulatory 
apparatus completely unequipped to handle the coming thrift explosion. 


Shades of Gray 

On a Monday in November 1982, stocky, congenial Edwin Gray was in New 
Orleans to attend the annual convention of the U.S. League of Savings Insti- 
tutions. Gray represented Great American First Savings Bank of San Diego, 
California; he was their PR man. His old friend from California, Ronald Reagan, 
was to be the keynote speaker at the convention. Gray and Reagan went way 
back together — Gray had been Reagan's press secretary during his years as gov- 
ernor of California. Gray, 47, was a mainstream Reaganite. He believed in 
Reagan and his free market philosophy. When Ronald Reagan was elected 
president. Gray had briefly taken a job with the administration as assistant to 
the president and director of the White House office of policy and development. 
But Gray's wife, Monique, had disliked Washington and its humid climate and 
wanted to return to their home in sunny San Diego, so Gray left the adminis- 
tration and went back to his post at Great American First Savings Bank. 

President Ronald Reagan was coming to New Orleans to tell members of 
the U.S. League of Savings Institutions that their industry was well on its way 
back to its halcyon days. With the signing of the Garn-St Germain bill less than 
a month earlier, Reagan believed he had personally unfettered a mighty industry 
which could now rise to towering heights. Gray believed the same, and in fact 
he had spent a good deal of time in Washington lobbying for the bill before its 
passage. Once, when he submitted a $2,000 expense voucher, his superiors at 
Great American Savings quipped, "Since you're spending so much time working 
for the U.S. League, lobbying for Garn-St Germain, maybe they can pick up 
part of this." One of the items on the tab was $600 for a dinner Gray had hosted 
for another old California friend, Ed Meese. 

Ed Gray was enjoying being a gadfly at the New Orleans convention when 
suddenly Leonard Shane, the 1983 chairman of the U.S. League, pulled him 
aside. The position of chairman of the Federal Home Loan Bank Board (the 


shades of Gray "17 

Washington, D.C. , agency that regulated the nation's federally chartered savings 
and loans) was coming up for grabs, Shane told Gray. Its current chairman, 
Richard Pratt, a Mormon and a burly former educator from Utah, was returning 
to private business.' Traditionally the U.S. League had a major say in picking 
the FHLBB chairman. 

"Ed, wc want you to be the next chairman," Shane told Gray. 

Gray was flattered. Bill O'Connell, president of the U.S. League, also asked 
him if he'd consider being chairman. Gray told them only that he'd think about 
it, but the word had already gone out among the membership that Gray had 
been given the League's benediction. Delegate after delegate came up to him 
and asked him to take the job. It became a little embarrassing, but the refrain 
was like music to Gray's ears. A thrift executive becoming chairman of the 
Federal Home Loan Bank Board was like a priest being elected Pope. How could 
he say no? Ed Gray's chimney soon issued forth the white smoke of acceptance. 

On May I, 1983, Ed Gray was sworn in as the seventeenth chairman of the 
Federal Home Loan Bank Board (FHLBB or the Bank Board), a three-member 
board that consisted of the chairman and two directors who were referred to as 
"members." Under law, one board member had to be a Republican and the 
other a Democrat. - 

With his wife at his side, Gray raised his right hand and took the oath of 
office, administered by his friend attorney general Ed Meese. Then Gray took 
off his horn-rimmed glasses and smiled. Those who were there that day remem- 
bered that he already looked tired. But being chairman of the FHLBB wasn't a 
hard job, and he'd promised Monique he'd stay only two years. Gray would 
have to make a lot of upbeat speeches about how well the industry was doing, 
and he was expected to support legislation the industry wanted — or that's what 
the job had been like for his predecessors. Had Gray known what really lay 
ahead, and that his term would turn out to be one of the longest and most 
tumultuous in FHLBB histor)', he might have put his right hand back in his 
coat pocket and taken Monique home to San Diego. 

In the coming four years, until the end of his term in June 1987, Gray 
would be investigated by the FBI and the Government Ethics Gommittee and 
badgered by congressmen and senators, including the powerful speaker of the 
House, on behalf of their constituents. His own administration, and his longtime 
friend Ronald Reagan, would turn their backs on him, turning him down when 
he asked for more money and more regulators to help deal with the massive 
abuses and insolvencies besetting the S&L industry. And that very same thrift 
industry that had begged him to take the job would vilify him for his efforts to 
save it. Ed Gray would become a pariah. 

Gray didn't know it then, but he had just been sworn in as the central 
character in an epic drama. And how unlikely a protagonist he was. Ed Gray 
was in no way prepared for the task that was about to be handed him. Some 


would say he vsasn't qualified for it either. He was a pubhc relations flack by 
trade. He gave warm smiles, firm handshakes and great back slaps, and he told 
a good story. He was an old-fashioned gentleman with thinning, graying hair 
who called his women acquaintances "dear." A nice guy, an honest guy . . . 
but he did not have the national stature of a Paul Volcker."' 

But then Gray had not been selected on the basis of his qualifications. He 
was supposed to be a cheerleader for the thrift industr. and a tool of the ad- 
ministration. That point was driven iionie his first day on the job when he 
received a phone call from Treasury Secretary Don Regan. 

"You're going to be a team player. I take it?" Regan asked him. 

"Sure," Gray said, leaning back in his swivel chair. "Sure." 

Regan hung up with Gray still holding the recei\er. What was that all about? 
Gray wondered. 

He threw himself into the job of chairman. He loved the idea of being a 
public official, and he took the responsibilih to heart. He was a Mr. Smith Goes 
to Washington kind of guy. Ed was no monetary genius, but what he lacked in 
experience he tried to make up for by putting in long hours. He wanted to know 
what was going on in the industr) and, conversely, he felt it would be helpful 
for thrift executives to know what was on his mind. So Gray had his staff mail 
copies of all his speeches to the directors and chief executives of the nation's 
major thrifts. "The Thoughts of Ed Gray" became a regular part of industry 
mail call. Stodgy industry leaders viewed all this with amusement, and the joke 
started to circulate that if you suddenly realized you'd been dropped from Ed's 
mailing list, it probably meant the Bank Board was getting ready to close your 

Gray was a very different kind of regulator than his predecessors. Like the 
president, who had appointed him, he held strong, sometimes simplistic views 
of what he considered to be right and wrong. And when he had to make decisions 
on technical matters, he let those instincts mold his course. 

Gray's first few months in office passed in relative quiet. The only problem 
on his plate at the time was untangling the mess left by the collapse of Manning 
Savings and Loan in Chicago. The Bank Board had closed Manning Savings 
just before Gray was made chairman. The $117 million thrift had failed after 
growing rapidly, not by attracting local deposits but by using deposits from deposit 
brokers to invest in questionable real estate ventures. 

Deposit brokers handled^ billions of dollars for institutional investors like 
pension funds, insurance companies, even Arab nations looking for a profitable 
place to park their oil revenues. They scoured the nation each morning for the 
highest interest rates being paid that day on certificates of deposit (GDs), and 
then purchased $100,000 insured CDs with their investors' money. Such bro- 
kered funds became known to regulators as "hot money" because they were 
temporary. When the certificates matured^ the money would again flow to 

Shades of Gray -19 

whomever was paying the best rate that day. I'he fieklencss of these deposits 
forced thrifts to offer higher and higher interest rates to attract them. 

Brokered deposits, in small doses, could help a thrift stabihze its deposit base 
and give it a quick, though expensive, source of funds when the thrift was a 
httle short. But Manning Savings had overdosed on brokered deposits. An old 
adage came to Gray's mind: The only thing that separated a medicine from a 
poison was the quantity in which it was used. Gray remembered another time, 
back in the 1960s, when thrifts had turned to brokered deposits in a big way. 
The result was a wave of cut-throat thrift competition for deposits that drove up 
the interest rate the S&Ls had to pay to attract those deposits. Thrifts willing to 
pay the highest price then grew too fast. The FHLBB in Washington had ended 
the practice in July 1963 by limiting the amount of brokered deposits a thrift 
could hold to 5 percent of its total deposits. 

But that was old-fashioned regulation. In 1980, when thrifts were having a 
hard time attracting deposits, regulators had repealed the 5 percent limit, and 
brokered deposits once again became all the rage. But unlimited brokered deposits 
combined with Garn-St Germain, which deregulated what thrifts could do with 
those deposits, created a volatile chemistry. Thrifts could get their hands on all 
the money they wanted and could invest that money in almost any scheme they 
thought might turn a profit.'' 

Gray saw immediately the risk inherent in the combination of ambitious 
entrepreneurial thrift owners, with their quest for high-yield investments, and 
the easily available brokered deposits to fund those investments. He knew that 
the Federal Deposit Insurance Corporation (FDIC)'^ under chairman William 
M. Isaac* was struggling with a similar problem, following the 1982 collapse of 
Penn Square Bank, a small shopping-center bank in Oklahoma City. Brokered 
deposits had fueled Penn Square Bank's wild speculation in oil industry invest- 
ments and had contributed to an unhealthy atmosphere of management fraud. 
(In 1988 a bank official would plead guilty to criminal charges in a scheme that 
regulators said involved risky loans and kickbacks.) But few people in Washington 
other than Isaac, and almost no one out in the 50 states, shared Gray's assessment. 

Since the creation of the federal S&L industry in 1932, state and federal 
savings and loans had coexisted peacefully. State thrifts could receive FSLIC 
insurance if they chose to pay the premiums,"* but they were regulated by state 
agencies and state regulations instead of the FHLBB and federal regulations 
(except that they did have to adhere to FSLIC standards). On the whole the 
differences between state and federal regulations were slight (though state reg- 
ulations tended to be more liberal than federal regulations) until federal dereg- 
ulation in the early 1980s changed the rules of the game. Then, many say, real 
deregulation happened on the state level. Notable among the states with more 


liberal thrift regulations were Arizona, Florida. lilinoi.s, Louisiana. Michigan, 
Mississippi, Missouri, New York, North Carolina, Ohio, Virginia, and Wash- 
ington. But Texas and California outdid them all, grabbing the lead in dereg- 
ulation one-upmanship (Texas won first place, but California ran a close second). 

Actually, deregulation was not new to Icxans. They had significantly lib- 
eralized regulations for state-chartered thrifts in 1972 and again in 1981. In 
addition, banking had for years been done differently in Texas. Typical features 
of the state thrift business included risk-taking, wheeling and dealing, and dom- 
ination by a good-old-boy network that had close ties to the most pov\ erful Texas 
politicians. When oil prices went from $7.64 per barrel in 1975 to $34.50 per 
barrel in 1981, the Texas economy boomed, building permits quadrupled, and 
Texans thought they were invincible. All the thrift industr\' needed then to rocket 
into the stratosphere was for the feds to approve brokered deposits and for the 
FSLIC to decide to insure S&L deposits up to $100,000 each, all of which 
happened in 1980. In the early 1980s Texas thrifts attracted huge deposits by 
promising to pay a higher interest rate than anyone else in the country, and 
they invested those deposits in commercial real estate ventures. Texas thrifts 
grew at roughly three times the national average. So many new owners were 
attracted to thrift ownership in Texas — because Texas thrifts seemed to be able 
to get their hands on endless supplies of money and the Texas real estate market 
was booming — that by 1987, when Texas thrifts finally were failing in large 
numbers, '" 50 percent were run by managers who had entered the business after 
1979 (over 80 percent were former real estate dcxelopers). 

Typical of the new thrift owner in Texas was Har\ey D. McLean, a Dallas 
developer and chairman of Paris Savings and Loan. Reports in BusinessWeek 
that he had attended a costume party wearing punk regalia and blue hair and 
joked that he was dressed that way to visit his banker surprised no one in the 
out-of-control I'exas thrift environment. Durward Curlec, a Te.xas thrift lobbyist 
who had been executive director of the powerful Texas Savings and Loan League, 
was referring to Texas thrift owners' penchant for fleets of airplanes when he 
remarked to a BusinessWeek reporter, "That's not criminal. That's Texas."" 

Out in California state-chartered savings and loans had been struggling to 
survive since 1975 under a state administration'- that employed hard-nosed 
regulators. When the federal government eased up on regulations between 1980 
and 1982, over half of the state's S&rLs, including most large California thrifts, 
switched to federal charters." The result was a precipitous drop in S&L contri- 
butions to state politicians and also in income (from fees charged to member 
thrifts) for the California Department of Savings and Loan, which regulated state 
S&Ls. The department lost more than half its income and had to lay off more 
than 60 state examiners. Under those dire circumstances Governor Edmund 
Brown, Jr. decided to treat S&Ls more kindly. 

Former State Assembly Minority Whip Paul Priolo told us later that the 

shades of Gray • 21 

California League of Sa\ing.s Associations (the Cal League), the thrift industry's 
statewide lobbying group, lobbied the state legislature every year with the same 
theme: "They told us every year that we had to pass legislation to match any 
federal legislation that might cause thrifts to switch to federal charters. The 
buzzword was 'parity.' I'hey constantly lobbied for parity, or better, with federal 
legislation. And they almost always got what they asked for. " Priolo said legislators 
knew little about the thrift industry and relied on the Cal League for guidance 
in drafting new state regulations. A former federal regulator said state politicians 
were also concerned they would lose contributions if state-chartered thrifts 
switched to federal charters. 

in response to the political and financial pressure. Republican state assem- 
blyman Pat Nolan, who was an associate of a number of S&L executives,'^ 
sponsored the Nolan Bill, which became law January 1, 198?. Under the terms 
of the new California law, virtually anyone could own an S&L, attract as many 
deposits as he could pay for, and invest all those deposits in anything. And it 
could all be insured by the PSLIC and backed by the full faith and credit of the 
U.S. government. California's deregulation made Garn-St Germain look con- 
servative by comparison, and in retrospect it was a terrible mistake. But only 
one lawmaker voted against it, and traditionalists in the thrift industry who 
worried about it kept their concerns to themselves. (Five years later, however, 
they would claim that the thrift industry's problems were not their fault.) 

Later Ed Gray would remark, "Can you imagine? Any business, any entre- 
preneur [in California] could get a charter and could run whatever operation he 
wanted on the credit of the U.S. government? Imagine that! It didn't matter. 
You could choose any business you wanted to be in. . . . Just incredible." 

Ed Forde, who owned San Marino Savings and Loan in Southern California 
(which failed in 1984 soon after Empire Savings collapsed), told us years later 
how he felt when he learned of the new California regulations at a seminar 
sponsored by state regulators. " 'My god,' I said to myself, 'this is what I've been 
waiting for all my life!' " Clever consultants and law firms began canvassing the 
state offering seminars on owning one's own savings and loan. Jeffer, Mangels 
and Butler, for example, was a Los Angeles law firm that gave seminars called 
"Why Does It Seem Everyone Is Buying or Starting a California S&L?"''' 

The strategy failed to attract back most of the thrifts that had recently .switched 
to federal charter, but it did attract hundreds of entrepreneurs interested in starting 
new S&Ls. What politicians and regulators later claimed they could not foresee 
(the loopholes and opportunities created by deregulation) were instantly recog- 
nized by those who wasted no time flooding the state with applications — 235 
between April 1982 and the fall of 1984. Unfortunately, the rush of applications 
far exceeded the state savings and loan commissioner's ability to investigate the 

When the job of state commissioner became available in March of 1983 


(with the new Republican administration of George Deukmejian), Ed Gray 
recommended his friend Lawrence W. Taggart for the post.'*' But Taggart, it 
turned out, had a very different regulatory philosophy from Gray. Gray was 
deeply troubled by the brokered deposits that by 1983 were fueling fearful growth 
in California, but Taggart saw no problems. When many of the new California 
thrifts ballooned their assets from the minimum start-up capital of $2 million 
to tens and then hundreds of millions of dollars, using brokered deposits, and 
when growth rates at some California thrifts exceeded 1,000 percent a vear, 
Taggart wasn't worried. On the contran,-, he took a real shine to the new breed 
of thrift owners, accommodated them in e\ er>- possible way, and approved their 
thrift applications as soon as the paperwork could be completed (he approved 
60 charters in his first six months in office). 

And look who showed up as California savings and loan owners: 

Dr. Duayne Christensen, a Southern California dcntist-turned-real-estate- 
speculator, got tired of begging for loans from straitlaced thrift officers and in 
January 1983 he opened North American Savings and Loan in Santa Ana, 
California. A married man with teenage children, Christensen had undergone 
a midlife crisis of some sort and had taken up with a flashy real estate lady from 
Oak Grove, California, Janet F. McKenzie. Both apparently shared a burning 
desire to be rich. 

In short order, according to an FSLIC lawsuit, the hvo began to wheel and 
deal with North American's deposits, investing them in grossly overappraised 
real estate projects in which they held a secret interest. One project alone (a 20- 
unit condominium project in Lake Tahoe, Nevada), which they acquired for 
less than $4 million, they sold back and forth to artificially increase its value to 
$40 million, regulators said. Reno mortgage broker John Masegian helped put 
together loans for the condominium deal. The next month, February 1983, 
while he was attending a savings and loan con\ention in Miami, he was garroted 
in the stairwell of the Fountainebleau Hilton. The murderers had tried to stuff 
his body down the trash disposal chute but it wouldn't fit.'" No one was charged 
with his murder. A security guard claimed that a few months later Christensen 
tried to hire him to kill a business partner who lived in Arkansas, but later 
Christensen changed his mind. 

North American collapsed in June 1988 and cost the FSLIC $209 million. 
The day before North American was seized by federal regulators, Christensen 
was killed in a mysterious single-car accident when his Jaguar slammed head- 
on into a freeway abutment at six o'clock in the morning, leaving a $10 million 
life insurance policy that named McKenzie as sole beneficiary and a will Chris- 
tensen had signed three days earlier that named McKenzie as his sole heir. The 
coroner ruled out foul play in Christensen's death and the $40 million that 
regulators said Christensen and his associates spirited out of North American 

shades of Gray ■ 23 

Savings remained missing. In April 1989 McKcnzie and four others were indicted 
and charged with racketeering. The case was pending as of this writing. 

A few miles away, in Raniona, California, former rug salesman John L. 
Molinaro and his partner Donald P. Mangano, who owned a construction 
company, were granted a charter and opened Ramona Savings and Loan in 
April 1984. in short order the thrift made loans to condominium construction 
projects being built by Mangano & Sons Construction Company, condominiums 
whose floors were later covered by carpets from Molinaro's carpet store. Regu- 
lators and the Justice Department later charged that the two men became more 
and more bold in devising ways to part Ramona Savings from its deposit money 
as time pas.sed. Two years after opening its doors Ramona Savings collapsed into 
insolvency. FSLIC officials said Ramona Savings would cost them $70 million. 

Ten months after Ramona Savings' collapse, a San Francisco passport clerk 
caught Molinaro trying to get to the Cayman islands"* on a dead man's passport. 
When the FBi arrested him and searched his Mercedes, they found false IDs 
and materials on how to establish a false identity and launder money. They also 
found, and filed in court, his list of things to remember, which included . . . 
"consider storing gold in Cayman deposit box . . . write out a plan for depositing 
Cayman cash and bringing some back thru (sic) Canada" . . . etc. When FBI 
agents checked inside the Cayman safe-deposit boxes, they found what the FSLIC 
believed was some of Ramona's money. Molinaro told FBI agents he had de- 
posited $3 million at First Cayman Bank, and in safe-deposit boxes he had 
stashed $278,000 in cash and $100,000 in gold and diamonds ... all accessible 
by secret code. 

The list of colorful characters who showed up at thrifts in California following 
deregulation was a long one, and they arrived at a time when the state regulatory 
commission was crippled by the recent loss of 60 examiners (caused by the 
budget crunch when state thrifts defected to federal charter from 1980 through 
1982). Not until Taggart was succeeded by William Crawford as state savings 
and loan commissioner in 1985 would the examining staff begin to be rebuilt. 

During those undersupervised years high fliers and swindlers looted the thrift 
industry of billions of dollars, right under the overworked examiners' noses. They 
even developed shoptalk to describe their crooked deals: "dead cows for dead 
horses," "cash for trash," "kissing the paper," "land flips," "daisy chains," and 
"white knights." Each was a sleight of hand that rogue thrifts employed around 
the country to confuse regulators and hide the frauds that underlay their oper- 

The profligacy of thrifts around the country, especially in Texas and 
California'"' (and secondly Florida and Arizona), didn't begin to catch Ed Gray's 
eye in Washington until the Empire Savings failure in 1984. By that time the 
horse was definitely out of the barn. Most of the problems were developing at 


state-chartered thrifts rather than federally chartered institutions (because the 
states adopted regulations even more lenient than were enacted on the federal 
level), but Gray was affected in a very important way by what happened on the 
state level because the FSLIC, which he and his fellow board members at the 
FHLBB administered, insured most of those state thrifts and would have to bail 
them out should they fail.-" Ironically, it was precisely the FSLIC coverage that 
made the looting of thrifts so lucrative and relatively risk free — for everyone 
except the FSLIC and, uUimately, the taxpayer. Thanks to the FSLIC insurance, 
depositors didn't have to worry about their money, and the people who were 
spending it certainly didn't. 


Centennial Gears Up for 


Before deregulation most thrifts were small. One did not go into the savings and 
loan business to get rich. In fact, starting a small community-based savings and 
loan bordered on performing community service — local people pooling their 
resources to assure there would be a safe place for their savings and a source for 
home loans. These small-town thrifts were just barely eking out a living when 
deregulation passed Congress and they became the prime targets for the wolves 
that deregulation unleashed. They were easy targets for the fast-talking high 
rollers who showed up to wow the mostly unsophisticated managers and boards 
of directors with promising projects or to offer top dollar to local shareholders 
for their stock. Hundreds of small thrifts across the nation fell into the wrong 
hands in the weeks and months following deregulation, and one of those was 
Centennial Savings and Loan, a state-chartered thrift in Northern California. 
From its plain vanilla beginnings. Centennial rocketed to unimaginable heights 
within just a few months after deregulation. But few people became concerned 
about the metamorphosis until Centennial's officers threw a spectacular Christ- 
mas party at the end of 1983. 

It was the most lavish Christmas party anyone could recall. "Elegant Re- 
naissance Faire" was the theme. Couples gasped as jesters proclaimed their entry 
into the hall, now transformed into an Elizabethan forest of 300 living trees 
sparkling with 75,000 tiny white lights. Candlelight shimmered through piped- 
in fog that simulated the moors and woods of Nottingham. Oriental rugs covered 
the floor. 

Once seated among the trees, the 500 invited guests were entertained by a 
hundred roving Robin Hoods, fiddlers, jugglers, jesters, and pantomimes. Wait- 
ers and waitresses, one for every two guests, wore Elizabethan costumes — swagger 
plumed hats, ruffled laced bodices, yards of velvet. They rolled the ten-course. 



three-hour meal into the hall on flaming carts, meats crackling on open spits, 
each course iieralded by twcKc trumpeters. 

Men and women visihng the rest room were attended by shoeshine boys for 
the men and maids-in-waiting with an array of makeup and perfumes for the 
women. Dancing continued until three o'clock in the morning, and to this day 
many say it was the most romantic evening of their lives. 

It was Christmas 1983 in Santa Rosa. California, and Centennial Savings 
and Loan officers spent $148,000 to show their friends, stockholders, and area 
politicians that the S&L had arrived. For the little thrift it was as much a coming- 
out party as a Christmas fete. But for those of us who had been paying close 
attention, it was another reason for concern. This was a very different Centennial 
from the small thrift that had opened in 1977 in Guerneville (population 1,700), 
20 miles west of Santa Rosa. 

Guerneville was on the banks of the Russian River 60 miles north of San 
Francisco. It had been a popular summer resort among the redwoods in the 
1940s and 1950s, but it had faded considerably as tourists passed it by for more 
exotic destinations in the sixties and seventies. Property values slid as the only 
takers for the old summer cabins were realtors and speculators betting Guerneville 
would soon become a bedroom community of its fast-growing neighbor, Santa 
Rosa (population 70,000). A handful of local investors drawn from Guerne\ille's 
hard-hit business community joined resources to raise the $2 million regulators 
required of a new savings and loan, and they opened Centennial in the hojie 
that the realtors and speculators were right. Their plan was to make home loans 
to those who would live in Guerneville and work in Santa Rosa. 

But the vision was slow in materializing and the little thrift spent its first 
three years going through a succession of lackluster presidents, none of whom 
left a memorable mark on the town or the institution's bottom line. However, 
as 1980 approached so did the dawning of the deregulation of the savings and 
loan industry. Centennial's directors wanted someone at the helm who could 
sail their little thrift out of becalmed seas and into the uncharted potential 
promised by this newly deregulated industry. 

One of Centennial's directors recalled his acquaintance with a man who 
had plenty of experience in the thrift industry. Erwin "Erv" Hansen, age 48, 
had been bouncing around the indiistn a long time. He had worked as a senior 
executive for Imperial Savings and Loan in Southern California, as a deputy 
commissioner and the number two person in the California savings and loan 
commissioner's office, as CEO for Far West Financial in Newport Beach, Cal- 
ifornia, and as chief accountant for the Federal Home Loan Bank Board in 
Washington, D.C. He was well known in the industry and was regarded as a 
conservative banker.' As frosting on the cake, Er\ was married to a local gal, 
Gayle, who told friends she looked forvvard to returning home someday. 

Centennial Gears Up for Deregulation ■ 27 

Early in December 1980, Erv Hansen drove into town in an aging car packed 
with family and belongings and on December 16 Centennial's board of directors 
voted to make Erwin Hansen the thrift's fourth (and last) president. 

Everyone just called him Erv. He shunned traditional banker's garb. Instead 
he would have looked right at home on the street in Dallas, with his Western 
sports coat and slacks, open-collar shirt, shiny bucking-bronco belt buckle, and 
pointed-toe cowboy boots. A tall man, he wore the outfit well. 

Erv cut a very different figure than Centennial's former presidents and he 
quickly won the friendship of Guerneville's redneck cowboy community with 
his love of drink and good company. His office away from the office was the 
Appaloosa Room at Buck's bar and restaurant, where he routinely held court 
after work and late into the evening. He'd buy drinks all around and regale those 
present with well-told stories, mostly about himself and his past exploits in the 
bigger world outside Guerneville. But Erv's favorite tales soon switched to a new 
theme: what he was going to do, what deregulation meant to him and Centennial, 
how the sky was the limit. 

"The beauty is that there's going to be enough money in this for everyone," 
he liked to boast. 

Erv swept the townsfolk off their feet. Even those put off by his sometimes 
arrogant ways found it hard to criticize him. He seemed a cross between John 
DeLorean and J. R. Ewing. But there were two dangerous unknowns: no one 
understood just what deregulation of thrifts meant in practical terms, and no 
one really knew Erv Hansen. 

It took time for Hansen to spur the lazy little thrift to a gallop. With its net 
worth of just $1.87 million, there wasn't much he could do, and shallow- 
pocketed locals were clearly not going to be the source for the kind of money 
he needed. But he had a plan. He knew where he could get plenty of capital, 
practically overnight — hundreds of millions of dollars in brokered deposits, just 
for the asking. But Centennial's directors, officers, and shareholders weren't 
ready just yet for the kind of moves Erv had in mind. So he decided to bide his 
time for a while and build alliances at Centennial with those who shared his 

Beverly Haines began as a teller at Centennial when it opened its doors in 
1977. Haines, 44, had been married to a well-to-do San Francisco contractor, 
but an unpleasant divorce in the early 1970s left her at times living at' the pleasure 
of friends and relatives. She eventually moved into the family's summer cabin 
in Guerneville with her teenage son, who had recently been paralyzed in an 


auto accident. His injuries left him in a wheelchair and in need of 24-hour 
care. Haines was totally dedicated to her .son, caring for him at night while 
working at Centennial during the day. 

She was bright and articulate, a short, well-dressed blonde with a cultured 
way of speaking and moving that attracted fawning admirers. She moved from 
teller to receptionist and held that position when Erv Hansen arrived on the 
scene in 1980. Haines was clearly a woman u.scd to better circumstances, and 
Hansen felt he and Haines had something to offer each other. The two became 
fast confidants, often meeting behind closed doors. Beverly was clearly on her 
way up. Hansen soon appointed her executive vice president of Centennial and 
put her in charge of the thrift's money desk, the entry point for large deposits 
from pension and trust funds and deposit brokers. It was a key position that later 
would become the fulcrum of the wheeling and dealing that Hansen had in 

At this time Siddharth "Sid " Shah was in Santa Rosa tr\ing his hand as a 
developer and not having much luck. Shah, 47, an East Indian, had come to 
the United States in 1963. He had majored in engineering at Stanford University 
near San Francisco and had gone to work for nearby Piombo Corporation, a 
heavy-construction company.- Shah worked for Piombo for 13 years, during 
which time he managed the company's projects in Saudi Arabia and, later, 
around Santa Rosa. 

Shah oozed a confidence that some found repulsive and others found cap- 
tivating. He was quiet, shrewd, and inscrutable. Associates described him with 
amazement as someone who "got things done," "knew how to work all the 
angles, " "was always working on some kind of deal ... a genius with paper" 
who could wring every penny out of a construction job. 

During his stay with Piombo, Shah acquired 8 percent of the company stock. 
In early 1982 Shah and Piombo had a parting of the ways and Shah announced 
he was leaving Piombo to strike out on his own. Piombo had a long-standing 
policy of purchasing any stock that a departing employee had accumulated during 
his stay with the company, but in this case Shah and Piombo's owners were not 
even close to a mutually agreeable price. Shah wanted $1 million for his shares. 
Piombo said the stock was worth only $200,000. Shah said he felt his price was 
fair because he believed the company could be sold for $13 million. Piombo's 
shareholders, eager to give Shah the opportunity to prove it, gave him an option 
to purchase Piombo for $13 million — but only if he could close the deal within 
a year. 

Meanwhile, Shah's Lakewood Enterprises — a development company in 
Santa Rosa — was going nowhere, and in the spring of 1982 Shah turned to Erv 

Centennial Gears Up for Deregulation • 29 

Hansen and Centennial. Botli men had big plans. Both told associates they 
wanted to make big things happen. And both saw a deregulated thrift industry 
as the opportunity of a lifetime. 

Shah introduced Hansen to Dutch investor Nicholaas Sandniann, ^6, who 
had sailed mysteriously into town with plans to develop the old 1,000-acre George 
Ranch east of Santa Rosa. Handsome and charming, with a lovely young wife, 
"Neik" quickly captured the imagination of the San Francisco area jet set. Herb 
Caen, columnist for the San Francisco Chronicle, described Sandmann as the 
"high-flying newcomer from Holland." Other press reports said he was "a re- 
clusive Dutch businessman who lives in a multimillion-dollar mansion in Am- 

He fit perfectly into the genteel Sonoma County horse-and-winery set of 
which Santa Rosa was the center. There the gentry played polo and croquet and 
sipped chardonnay and cabernet — made in their own cellars — on their mag- 
nolia-shaded verandas overlooking vineyards soothed by Pacific Ocean mists. 
Sandmann knew how to play that game. Shah and Hansen were eager to learn. 

hi July of 1982, regulators said, loan money began to flow among the three 
men. Centennial loaned Sandniann $5.4 million on his George Ranch devel- 
opment and paid Shah's company, Lakewood Enterprises, a $150,000 finder's 
fee for introducing Sandmann to Centennial. Later the George Ranch deal 
would collapse in a flurry of defaults and allegations of fraud, inside deals, and 
kickbacks, but in 1982 it looked brilliant and significantly improved Centennial's 
financial statement. 

Such large loans improved a thrift's financial picture because thrifts were 
allowed to book a lot of income immediately upon making a loan. For example, 
they collected points — usually 1 percent to 6 percent of the loan. On a $1 
million loan with 5 points, a thrift could immediately book $50,000 in income. 
Fees, such as "loan origination fees, " were also added to the borrower's bill. 
These, too, went right on the thrift's books as income as soon as the loan was 
made. Simply put, loans generated instant income for thrifts, and the bigger the 
loan, the bigger the income. Often thrift executives used inflated appraisals to 
justify even larger loans, so they could book even larger profits, which in turn 
justified large bonuses for the executives. 

Unfortunately, all this profit was only on paper because thrifts routinely 
added the points, fees, and even the interest to the amount of the loan.' For 
example, if a borrower wanted a $1 million loan, the S&L might loan him $1.2 
million and put the extra $200,000 in a reserve account to cover the first two 
years' worth of interest. In effect, the S&L was paying itself until the reserve 
account ran out. The reserve accounts made a loan appear current for a long 
time regardless of the true state of the project (or the whereabouts of the bor- 
rower)."" And if the loan came due and the project then turned out to be phony. 


the loan could be rolled over (renewed) on the theory, California Savings and 
Loan Commissioner William Crawford later quipped, that a rolling loan carried 
no loss. 

With such tricks up his sleeve, Hansen had no worries about the generosity 
of Centennial's loan on the George Ranch. He was on a roll. Sensing the 
momentum he was building, he struck quickly. One bold move would follow 
another, starting with the boldest of all: In August of 1982 Hansen convinced 
Centennial's board of directors, which now included one-time receptionist Bev- 
erly Haines, to purchase Shah's option on Piombo Corporation for $100,000 
and to pay Shah $1 million for his Piombo stock — five times more than Piombo 
itself was willing to pay. Centennial would then exercise the option and purchase 
the giant construction company for $13 million cash, proving Shah to be a man 
of vision by validating his boast to skeptical Piombo shareholders that their 
company was worth $1? million. Shah would become head of Piombo and an 
executive at Centennial the day the deal closed. 

Centennial would benefit, Hansen argued, because deregulation was making 
it possible for thrifts to invest in commercial real estate and become development 
companies, and Centennial needed to position itself to take advantage of the 
new opportunities for fun and profit. California's Nolan Bill, which allowed 
state S&Ls to invest 100 percent of their assets in speculative ventures, was set 
to go into effect January 1, 1983. Hansen was pushing Centennial up onto the 
cutting edge of California's thrift deregulation movement. 

Centennial's board of directors approved the plan but kept it secret, and in 
September, four months before the deal was set to close. Shah, still technically 
only a customer and therefore exempt from banking regulations that forbade 
large loans to thrift officers, received a last-minute flurry of loans from Centen- 
nial. In a nine-day period, FSLIC documents indicate. Shah and Lakewood 
Enterprises received four loans, totaling $1,450,000, secured by various prop- 
erties that the FSLIC would later claim were worth far less than the amounts 
of the loans. In 1981 Shah's company had reported to the IRS only $100,815 
in assets and a loss of $16, 576. Needless to say, most bankers would not consider 
that sufficient security for a $1.45 million loan. (All four loans would ultimately 
end up in default.) 

In late November, Hansen made the Piombo deal public. Centennial 
was purchasing Piombo Corporation, he announced, for $14,100,000 ($13 
million in cash to Piombo, $1,100,000 to Shah). Steve Pizzo had just taken 
over as editor of the Russian River News and immediately began to hear com- 
plaints from friends who were Centennial shareholders. They were confused, 
angry over being frozen out of the decision, and concerned about the way the 
deal appeared to have been ramrodded through Centennial's board of directors. ' 
Pizzo, a former real estate broker and investor himself, also found the deal 
perplexing. It was a highly speculative move on Centeimial's part and he couldn't 

Centennial Gears Up for Deregulation 'SI 

figure out where Centennial was getting the $1? million in cash to purchase 
Pioinbo Corporation. 

After a couple of clays of stalling, Hansen finally agreed to an interview for 
the local paper. It was Pizzo's first encounter with Hansen, who greeted him 
dressed in brown Western slacks, cowboy boots, and Western shirt with open 
collar. Hansen's six-foot-plus frame filled the small four-by-cight office. A gold 
Rolex watch glittered on his wrist, a gold chain and pendant hung around his 
neck, and a large gold-and-silver cowboy buckle cinched his belt. 

Deregulation was going to be a real boon to Centennial Savings and Loan, 
Hansen told Pizzo. It was going to pull the little thrift out of the doldrums and 
into the financial fast lane. And part of the steam for this engine, he said 
expansively, would be generated by the construction company, with its ability 
to develop large real estate projects. 

Hansen and Pizzo did not hit it off. There were big holes in Hansen's analysis 
and Pizzo wrote a commentary that raised questions about the wisdom of the 
deal itself and about the potential conflicts of interest inherent in a lender owning 
its own development company. What would prevent the lender from making 
risky loans to that subsidiary, especially during recessions, when development 
companies invariably fell on hard times? Pizzo's editorial hit the street a few 
days later and provoked a roar of outrage from Hansen. He threatened to sue 
the Russian River News if the piece resulted in any substantial withdrawals by 
depositors, simply the first salvo in what would turn out to be a three-year diatribe 
to silence opposition. 

When Pizzo asked Erv where Centennial was getting the $13 million in 
cash to buy Piombo, Hansen waved his hand in the air and brushed the question 
off by stating that the money was "brokered deposits from the East Coast and 
from the Bureau of Indian Affairs." Hansen had strapped Centennial onto the 
roller coaster of brokered deposits, the "hundreds of millions of dollars just for 
the asking" that he had all along intended to tap as soon as he built alliances 
and had Centennial's board of directors under his control. He had acquired 
these deposits simply by placing ads in The Wall Street Journal guaranteeing to 
pay interest rates on insured certificates of deposit (CDs) that were slightly higher 
than the going market rate (in 1982 the going market rate was averaging 10.4 
percent and in 1983, 9.22 percent). 

Once a thrift began to depend on brokered deposits, it was in for a wild ride. 
Like using cocaine, the lure of easy brokered deposits often began innocently 
but soon became a compulsion and finally a physical necessity. Brokered deposits 
were a way for a thrift to grow larger than the resources of its local depositors 
would normally allow. Centennial's total assets at the beginning of 1983 stood 
at $49 million. By the time regulators seized the thrift in August 1985, its assets 
had ballooned to a grotesque $404.6 million, thanks in large part to brokered 


When Hansen told Pizzo he was using "brokered deposits from the East 
Coast" to purchase Piombo Corporation, Pizzo understood. But Hansen's "Bu- 
reau of Indian Affairs" comment, which Hansen wouldn't clarifv', left Pizzo 
baffled for five years. Finally, one day in 1988, after we were well along in our 
investigation of savings and loans elsewhere, we received a thick, unmarked 
package from an attorney on the East Coast. The contents of the package had 
nothing to do with Centennial (they related, instead, to Mario Renda, an East 
Coast deposit broker who was placing deposits at Centennial. See First United 
Fund chapters), but they provided the clue that enabled us to piece together the 
Bureau of Indian Affairs (BIA) puzzle. 

Among the dozens of enclosures in the package was a handwritten letter to 
the East Coast attorney from an inmate at P'ort Leavenworth federal penitentiary. 
He said he was serving a five-year prison sentence for wire fraud that involved 
a credit union, brokered funds, and linked financing. He told the attorney that 
the Bureau of Indian Affairs was involved in many of the failures of financial 
institutions, and he said he knew the names of companies and people in those 
companies whose job it was to take gifts to BIA officials. 

Ringing in Pizzo's ears as though it had been the day before and not five 
years earlier was Han,sen's comment that he was getting money from the BIA. 
We called the attorney on the East Coast, but she had no idea what the BIA 
reference meant and, in fact, had paid no attention to it because it didn't make 
sense to her. So we contacted the prisoner at Fort Leavenworth who had written 
the letter and he gave us the leads we were after. 

We discovered that the BIA controlled one of a number of large government 
trust funds that deposit brokers tapped into for deposits — brokers got deposit 
money firom pension funds, credit unions, and oil sheiks, and they also got 
deposit money from government trust funds. The BIA at that time managed 
$1.7 billion for American Indians. The Bureau was required by law to invest 
the money with government-insured institutions (by purchasing short-term CDs), 
and as often as several times a week they notified brokers that they had money 
to invest. Brokers served as middlemen, searching the nation for institutions 
offering the highest interest rate on short-term CDs on the day the BIA money 
became available for investment. 

Brokers placing funds for the BIA were paid a commission from the institution 
that received the BIA deposits. There was fierce competition among brokers for 
the BIA money, and in depositions taken in the Fort Leavenworth prisoner's 
case in 1985, a deposit broker told the court it was his understanding that bribes 
to BIA officials in exchange for deposits were a routine business expense for 
deposit brokers.* 

Since the S&Ls paying the highest interest rate on deposits were the S&Ls that 

Centennial Gears Up for Deregulation • 33 

were so desperate for money that they were wilhng to pay whatever it took to get it, 
this process put government in the position of rewarding, i.e., pouring money 
into, the nation's weakest financial institutions. For this reason regulators in 
Washington vehemently opposed the use of deposit brokers by managers of gov- 
ernment funds. Their opposition centered on the BIA fund because it was 
the largest government trust fund, but when they tried to halt the investment prac- 
tice they ran up against the political opposition of a tough lobby, the Indian lobby, 
which naturally enough wanted to get the highest possible return on its invest- 
ments. FHLBB Chairman Ed Gray complained bitterly during this time that the 
BIA was channeling much of its deposit business to the country's weakest thrifts. 
He said that the BIA had funds in practically every thrift that had recently failed. 

We now knew where Centennial got the fuel to power its enormous 
growth — from deposit broker Mario Renda and the money changers handling 
deposits for the BIA trust fund. There was enough money out there to feed 
hundreds of Centennials. 

Centennial's purchase of Piombo, funded by brokered deposits, closed on 
January 6, 1983. In a staggering increase of assets. Centennial went almost 
immediately from a neighborhood savings and loan with a net worth of $1.87 
million to a development conglomerate with thrift, construction, and develop- 
ment subsidiaries. The deal made Shah and Hansen wealthy and powerful, 
virtually overnight. Using the $1 million Centennial paid him for his Piombo 
stock, Shah bought up Centennial shares from disaffected Centennial share- 
holders until he became the thrift's largest single stockholder. He became ex- 
ecutive vice president of Centennial, chief executive officer of Sonoma Financial 
Corporation (Centennial's new development subsidiary), and chief executive 
officer of Piombo, at a salary of $120,000 a year for five years, plus a yearly 
bonus (like Hansen's) of 10 percent of Centennial's profits. In a short six months 
Sid Shah had gone from construction engineer and failing developer to Northern 
California mover and shaker. 

Hansen and Shah came to rely on brokered deposits to fiind much of their 
activity at Centennial. But brokered deposits, with their combination of high 
interest rates and commissions to deposit brokers, were an expensive way to get 
money, so Hansen and Shah had to come up with a profitable use for it. And 
Erv, though he began short on funds, was never short on ideas. He planned to 
turn Centennial the sow's ear into Centennial the silk purse through real estate 
speculation. By early 1983 the critical pieces of the plan were in place, with 
one exception: Hansen wasn't satisfied with just his fat salary. He needed access 
to even more money. 

A regulation prohibited thrifts from making more than $100,000 in unse- 
cured commercial loans to their employees, officers, directors, or major share- 


holders unless the Federal Home Loan Bank approved. Clearly that was an 
inconvenient rule for thrift officers with expensive tastes. How could Hansen 
and his cohorts participate personally in the real estate developments and reap 
the massive financial rewards they envisioned? A mechanism had to be triggered 
to circumvent this regulation. To that end Hansen formed close alliances with 
officers at other savings and loans. Immediately money began to flow like artesian 
spring water among the main players. 

Hansen had an old friend who had become the head of his own thrifts — 
Columbus Savings and Loan in San Francisco and Marin Savings and Loan in 
nearby San Rafael, later combined to become Columbus-Marin Sa\ings and 
Loan. Regulators would later charge that the two men conspired to make loans 
to one another in order to circumvent the ioans-to-affiliated-pcrsons regulations. 
Before it was over Hansen received three loans totaling $174,000 from Colum- 
bus-Marin, loans on which regulators said he was routinely delinquent. Court 
documents showed that Hansen's friend received $550,000 in loans from Cen- 
tennial, and he then approved a $250,000 line of credit for Hansen at Columbus- 
Marin. The FSLIC later charged that Columbus-Marin also loaned $50,000 to 
Shah and made at least 14 loans to other Centennial executives, including a 
$505,000 loan for Dutch investor and Hansen/Shah business partner Nicholaas 

Another reason to have like-minded thrifts "on the program" was to have a 
way to get rid of bad loans, and this was the role Hansen envisioned for Atlas 
Savings and Loan in San Francisco. Thrifts routinely sold parts or all of their 
loan portfolios to other thrifts. These transactions, called "participations," were 
a perfectly legitimate way for the selling S&L to raise cash and the purchasing 
S&L to fatten its loan portfolio. But Hansen needed someone to sell his bad 
loans to — someone who might miss the fact that the loans had been made to 
shaky borrowers on property that was grossly overappraised. In short, Hansen 
needed a sucker, and that's precisely what he had in mind for Atlas Savings. 
Atlas soon found itself the proud owner of $6.5 million in loan participations 
purchased from Centennial, and Centennial had some of Atlas's hard-earned 
cash. A year later these participations would turn out to be a package of rotting, 
"nonperforming" loans, according to an FSLIC lawsuit. These, plus other loans 
Atlas bought from Centennial, ultimately led to Atlas's collapse in 1985. 

We would discover as our investigation matured that participations like the 
ones Hansen sold Atlas were the AIDS \irus of the thrift industr) . Imiocent 
thrifts exchanging loans with a thrift infected by fraud would find months later 
that they had picked up some terminally ill loans. Through the use of partici- 
pations in the 1980s, the thrift industry spread its problems much more widely 
than otherwise would have been possible. 

In another case Erv fathered an ally when he had Ccntemiial help i\\o young 
Sonoma County brothers, Leif and jay Soderling, break into the thrift industry 

Centennial Gears Up for Deregulation ■ 35 

by loaning them $1 million of the $2 million they needed to start Golden Paeific 
Savings and Loan in Windsor, near Santa Rosa. Centennial promptly paeked 
Golden Pacific's management team with people from its own ranks, ensuring 
that a close relationship would ensue. And it did. 

"Erv just picked up the phone one day and called Jay Soderling, " Beverly 
Haines said. "He told Jay he needed $250,000 right away. Jay cut a cashier's 
check out of Golden Pacific and drove right over with it." Haines tapped Golden 
Pacific for $125,000 (which she said she gave to Erv), and regulators claimed 
Shah got at least $1 million.^ All these loans later went into default. 

Meanwhile, back at the George Ranch, things were not going well on the 
Sandmann loan. Less than a year after getting the $5.4 million from Centennial, 
Sandmann was already in default, FSLIC attornies later claimed. Legally, Cen- 
tennial could have foreclosed on the project, taking it over for what Sandmann 
still owed. But Hansen and Shah interceded on behalf of their friend (and 
business partner). Rather than foreclose on the property. Centennial bought it 
from Sandmann's company, Damstraat (named for a street in Amsterdam), for 
$8.1 million, the FSLIC charged, allowing Sandmann to pocket a quick $3.7 
million profit. Centennial then hired Sandmann as a project manager for six 
months and paid him yet another $300,000. 

In 1983 Centennial moved its corporate offices from Guerneville to Santa 
Rosa, an appropriate move for a company quickly becoming a financial power 
in Northern California. The thrift bought and remodeled a large office building 
downtown on Fourth Street, and the total cost was pegged at somewhere near 
$7 million— 30 times the value of its former Guerneville home. Everything at 
the new office was first-class: oak, brass, etched glass, box-beamed ceilings, 
mirrored walls, plush carpets. There was a board room big enough to jog in 
with a conference table long enough to skate on. Western oil paintings graced 
the walls and cowboy sculptures stood on cabinets and desks. A five-foot-high 
solid crystal horse head dominated the conference room. Finally, Centennial 
Savings and Loan executives had the setting and accoutrements that reflected 
their ambitions. 

But as plush as Centennial's new home was, Hansen and Shah wanted more, 
and Shah had just the ticket. Back in 1980 he had purchased an old stone 
building on the outskirts of Santa Rosa, county records showed, for about 
$150,000. Built in 1909 as a hotel, the building had fallen on hard times and 
had last been home to a topless bar. Hansen immediately saw the big-ticket 
opportunity in that old stone building. He, Shah, and Sandmann transferred 
the property into a partnership they formed called Stonehouse Partners and later 
sold it to Centennial for $1 million, "as is. " Erv told Centennial's board of 
directors that the old building would make a wonderful headquarters for Cen- 


tennial Corporation, the new holding company of Centennial Savings and Loan. 
Regulators said he did not tell the directors or the regulators (because it would 
have been a conflict of interest for him to benefit from the purchase) that he 
was one of the Stonehouse Partners. 

Then the buying spree really began. Hansen, a renowned ladies' man, had 
made the acquaintance of a stunning young woman who fancied herself an 
interior decorator. He took an inmiediate liking to her, and the two began a 
relationship that ultimately would cost Centennial hundreds of thousands of 
dollars. When Hansen needed a decorator for the Stonehouse, according to 
Haines, he hired his young friend. Over the next few montiis the two of them 
flew often to Los Angeles and Las Vegas, on Centennial's twin-engine Cessna, 
on "buying trips." And buy they did. Hansen never required that she submit 
invoices for the furniturr and art she bought, Haines told us, but simply had 
Centennial pay whatever she submitted in the way of bills. There were antique 
desks: Hansen's cost $48,000 and he paid extra to have American eagles carved 
on the front; Beverly Haines's, an old French Provincial, cost $12,000 and she 
complained that the drawer was too heavy to open. Then there was the $35,000 
French Provincial gold-and-silver chess table with an inlaid marble top and 
matching gold-and-silver chessmen. Hansen wanted to use it as an end table, 
but a couch has two ends, after all, so a second table, a reproduction, was ordered 
for an additional $35,000. 

In addition. Centennial spent over $1 million renovating the Stonehouse 
offices. A full gourmet kitchen was installed so the European chef, hired at 
$48,000 a year, could prepare meals for Centennial's business guests. Hansen 
spent $90,000 decorating his own office, which featured a full wet bar. The 
conference room was appointed with the finest in antique tables, chairs, settees, 
and Persian rugs. The building was simply magnificent. Santa Rosa had never 
seen anything like it. For those who had known Hansen just a few short months 
earlier, it was a disorienting sight. 

Hansen m"»'ed the corporate office into the Stonehouse as soon as the work 
was completed. But four months later he moved ever\one back to the Fourth 
Street building. The Stonehouse proved to be cold and uncomfortable. 

"It reminc d me of a mortuary," Haines told us later. It was placed on the 
market, but there were no takers for the $2 million white elephant.** 

Hansen and Shah then decided Centennial needed a place in San Francisco 
where they could entertain out-of-town dignitaries. So they purcha.sed a pent- 
house ("a pied-a-terrific," gushed San Francisco columnist Herb Caen) on Lom- 
bard Street in San Francisco for $773,487. Again Hansen's interior decorator 
friend was employed to redecorate the place, for an additional $150,000. 

Hansen wanted Centennial to have a way to chauffeur dignitaries from one 
place to the next, so Haines said that Sandmann, by then a Centennial vice 
president, arranged the purchase of a 1971 stretch Mercedes limousine for a 

Centennial Gears Up for Deregulation ' 37 

mere $30,000. Ihifortunately, the car was in Holland. By the time it wa.s re- 
trofitted in the U.S. to meet American smog and safety standards, Haines said, 
the car cost Centennial $77,000. Paying the bill, though, didn't mean Centennial 
owned the car, which FSLIC investigators later discovered was registered in 
Hansen's name. 

Cars were an obsession with Hansen, and one afternoon he decided to go 
out during lunch and kick .some tires. Before tlie afternoon was out he had 
purchased five cars for himself and his family: three station wagons, a four- 
wheel-drive pickup for his son-in-law, and a snappy Datsun 280Z for himself. 
The FBI reported the cars were paid for with an $89,792.42 Centennial Savings 
and Loan cashier's check. Hansen called Haines and told her to bring the check 
down right away. He told her he would reimburse the thrift later, but the FBI 
said he never did. 

On special occasions, like weddings and civic events, Hansen made a point 
of being seen around town behind the wheel of his 1930s-vintage Rolls-Royce, 
for which he paid $137,000. And to ensure they did not feel left out, Hansen 
arranged for the heads of each of Centennial's several subsidiaries to receive 
brand-new Mercedes-Benzes, except Haines, who requested, and got, a BMW. 

"I didn't want a big car," Haines told us. 

It wasn't long before these spending sprees caught the attention of the public. 
Few knew quite what to make of them, but most people accepted the ostentatious 
life-styles of Centennial's top officers as one more piece of proof that the area 
was becoming a playground for the rich and famous. Almost everyone felt that 
Santa Rosa and the surrounding areas were destined for explosive growth. Look- 
ing at all the Centennial glitter, some saw it as the first positive proof that the 
boom times had arrived. And if that were so, then perhaps Shah and Hansen 
were the vanguards and visionaries who would blaze the shining path to success 
and riches for the rest. By throwing money around, Hansen and Haines rose to 
positions of considerable prestige in Northern California. 


$10,000 In a Boot 

Er\' Hansen was building Centennial into a center of financial power in Northern 
California. But not everyone shared his vision. A small but growing number of 
p)eople began to openly express concern about Centennial's rapid growth and 
feverish activities. Something was fishy, people whispered. Savings and loans, 
"thrifts," were supposed to be thrifty, not splashy, deregulation or not. S&rL 
executives were supposed to be staid, dour, predictable, thoroughly dependable 
fellows. What was Centennial up to? 

The Russian River News continued to nip at Centennial's heels, and in May 
of 1983 Hansen gave $50,000 to a small competing tabloid in Guemeville called 
The Paper, which was having money troubles. The Paper's manager, Tom Rich- 
man, was soliciting financial support from the community to keep his publication 
in business. He dropped by Centennial, and Hansen was more than happy to 
help out. He paid the first installment — which sources said was $10,000 — right 
on the spot. 

"Hansen just reached down into his cowboy boot and pulled out a wad of 
cash and handed it to him," an FSLIC attornev told us. Hansen later said he 
hoped the extra money would tip the competitive balance between the two 
publications and put the Russian River News out of business. Fifty thousand 
dollars went a long way in a town of 1,700. Richman later described the $50,000 
as a gift. Documents filed in a FSLIC suit showed Centennial even considered 
becoming The Papers partner. 

But Hansen was interested in buying more than good press. Success and 
money always attract politicians, and Centennial attracted its share. Congressman 
Douglas Bo, JO, a Democrat, came from a small town near Guemeville where 
he had been a Haines family friend. A born politician, he was an attorney and 
former member of the California state legislature (where he was a member of 
the Assembly Unancc, Insurance and Commerce Committee). Centennial was 


$10,000 in a Boot • 39 

quick to lavish attention on Bosco. Bosco's mother was given a job working for 
Haines at Centennial, and Shall fiircd a friend of Bosco's to manage Shah's 
company, Ijakcvvood F.nterprises. 

Hansen, Shah, Haines and various family members were listed as contrib- 
utors to Bosco on his 19(S3 and 1984 disclosure statements. In addition, Bosco 
borrowed $124,000 from Centennial and $65,000 from Colden Pacific between 
1982 and 1984. ' His payments were often late and a thrift executive told us S&L 
officers had to call Bosco in Washington to discuss bringing his payments current. 
Bosco said the tardiness was caused by frequent moves. In 1984 Bosco used 
Centennial's private plane to attend the funeral of a constituent and failed to 
report it on his federal financial disclosure form. He said the failure was an 
oversight. In 1986 he was questioned by the FBI about Centennial Savings but 
he was not accused of any wrongdoing. (An FBI agent told us that if the FBI 
investigated Bosco for his relationship with Centennial, they'd have to investigate 
all congressmen because they all did the same thing. ) Bosco said his relationship 
with Centennial was completely above board, that he never asked them for any 
personal favors, nor did they ever do him any. But with powerful friends Cen- 
tennial Savings' influence in the community prospered nicely. 

One of the more remarkable political relationships that developed at Cen- 
tennial was between Sonoma County's chief law-enforcement officer. Sheriff 
Roger McDermott, and Hansen. The sheriff was a guest on several flights of 
Centennial's corporate plane and accompanied Hansen and others on trips to 
Canada and Las Vegas. McDermott also became a partner in a construction 
company that was working almost exclusively on Centennial projects, including 
a multimillion-dollar condo development in Bullhead City, Arizona, on the 
Colorado River about 60 miles south of Las Vegas. 

Centennial's sweet scent went out beyond Sonoma County, and like bees 
to honey, individuals with criminal backgrounds and organized crime connec- 
tions found their way to the savings and loan. For them, we would learn, 
deregulation of the thrift industry was the best thing that had happened since 
Prohibition poured millions of dollars into their ever-waiting hands. 

The first person to raise Pizzo's suspicions was Norman B. Jenson. A slight, 
silver-haired man, he was a Las Vegas attorney, but he had various other interests. 
He told us later that he had had, for example, significant business dealings with 
Sid Shah and Piombo Corporation before Shah teamed up with Centennial. 
Jenson had met Shah some years earlier when Piombo was bidding for work at 
Murrieta Hot Springs, a project near Palm Springs being developed by Morris 
Shenker, owner of the Dunes Hotel and Casino in Las Vegas. (Shenker had 
been Teamster President Jimmy Hoffa's attorney and was described by the Pres- 
ident's Commission on Organized Crime as an associate of Kansas City organized 


crime boss Nick Civella.) Jenson was a potential investor in Shenker's Murrieta 
Hot Springs development, and he said he had met Shah when Piombo was 
positioning itself to get a construction contract on the project. Jenson also had 
real estate investments near Santa Rosa, and he and Piombo had joined in 
several joint-venture partnerships. 

Soon after Shah became a central figure at Centennial, Pizzo went to the 
county recorder's office to research Shah's land holdings and real estate trans- 
actions, and he discovered documentation of several local deals between Piombo 
and Jenson. Pizzo found Jenson to be a shadowy character who left a confusing 
paper trail. He drifted in and out of complex deals in ways that left Pizzo 
wondering what was in the deals for Jenson. in many of Jenson 's joint-venture 
partnerships with Piombo, Jenson eventually, mysteriously, deeded without re- 
muneration his portion of the joint ventures to Piombo. Property didn't seem 
to get bought and sold, it just appeared and then got transferred. Jenson was 
maddening to trace, always hidden behind several layers of paper corporations 
and powers of attorney. To Pizzo he seemed to be acting like a man with a lot 
to hide. 

Pizzo checked further into Jenson 's past and more questions surfaced. Jenson 
had been a principal in the Holiday Casino in Las Vegas, and he and a partner 
had held a $1.7 million mortgage on the Shenandoah Hotel and Casino. Evi- 
dently he carried some weight in Las Vegas casino circles. A computer search 
on Jenson's name coughed up a 1981 United Press International stor>' about the 
indictment of two men from New Jersey charged with extortion. According to 
the article, Thomas Principe, 49, described by the FBI as "one of the most 
prolific hit men on the East Coast," and Dominick D'Agostino, 64, who had 
interests in the trucking business, were charged with extorting $300,000 from 
two Philadelphia developers. The money, according to federal investigators, had 
been extracted under threat of violence to their persons, property, and families 
to finance a Las Vegas casino project. The $300,000 was allegedly delivered to 
Thomas DiBiasi, an attorney, who then made out a check in that amount to 
Norman B. Jenson and his partner, owners of the proposed casino site. (Jenson 
later told us he became a government witness in the case.) 

As the months went by Pizzo periodically checked filings at the county 
recorder's office, but nothing new appeared in Jenson's name, and there was no 
evidence to connect him directly to Centennial Savings. His relationship seemed 
to be with Shah and Piombo, not Centennial. Not until three years later would 
Pizzo get the tip that unraveled the Norm Jenson mystery: 

One afternoon in August 1986 Pizzo was sitting in the Russian River News 
office reading a recently delivered copy of the National Thrift News. He spotted 
a story about the collapse of three thrifts, one in Washington state, one in Texas, 
and another in Louisiana, and he glanced through the article, wondering how 
such widely separated thrifts might have been related. A name buried on the 

$10,000 in a Boot • 41 

third page, near the end of the story, jumped out of the gray text — Norman B. 
Jenson. The FSLIC was claiming in a lawsuit that the three thrifts had conspired 
to make Jenson a $4 million loan on a Las Vegas casino, the DeVille Casino, 
for which they said Jenson had paid a $50,000 kickback to the president of the 
Louisiana thrift, Guy Olano. The loan later went into default. 

The fact that Jenson had been dealing with thrifts in Louisiana, Washington, 
and Texas had staggering implications for Pizzo. He had developed a nagging 
suspicion that what he was seeing at Centennial might be happening at other 
thrifts as well. His suspicion was based on nothing more than the belief that if 
a looting were in progress at Centennial, perhaps other thrifts were also being 
victimized. He had mentioned his suspicions to state regulators, but they treated 
him more like someone reporting a flying-saucer sighting than someone sounding 
an alarm. He continued to worry nonetheless. The deals were just too smooth 
and too slick, and too much money was disappearing, for this to be no more 
than a pack of amateurs fleecing a bank. 

The National Thrift News story lent unexpected support to these concerns. 
If Jenson was out there working over other thrifts — in a deal that had involved 
thrifts in three states — then maybe he wasn't alone. Were there others? Who 
were they? Was this a nationwide conspiracy? How bad was it? Could the Mafia 
or other organized crime figures be involved? Were they networking? How? How 
many thrifts were threatened? Pizzo made some phone calls to defense attorneys 
and learned that Jenson's loan had been arranged for him by a loan brokerage 
firm in San Antonio, Falcon Financial, owned by loan broker John Lapaglia, 
who was in federal prison serving a 14-month sentence for failing to report 
$169,000 in income on his 1979 federal tax return. In John Lapaglia we had 
our first clue as to how events at several savings and loans might be connected. 

Loan brokers put borrowers together with lenders for a commission — and 
sometimes a piece of the action. If the borrower were on the up and up, the 
broker's service was a service to all. But if the borrower were a crook, the loan 
broker knowingly or unknowingly could become a kind of traveling host to that 
dangerous virus, introducing it to thrifts from coast to coast. We learned that a 
handful of roving loan brokers traveled this country like nomads, putting deals 
together. They were the synapse across which both legitimate and illegitimate 
business jumped in the thrift industry. When deregulation of the thrift industry 
greatly expanded thrifts' ability to invest in multimillion-dollar real estate proj- 
ects, it created a gold mine for loan brokers (whose commission was based on 
a percent of the loan). Deposit brokers pumped money into thrifts and loan 
brokers pumped it out. 

Jenson's involvement in the complex DeVille Casino deal put him in a new 
light, and Pizzo decided to investigate him more intensely. During a search for 
documents relating to Jenson, Pizzo turned up a deed for a Santa Rosa home 
that he learned had been the subject of an arson probe by county investigators 


after a predawn fire on December 2, 1982. He contacted a count>' fire chief 
who had become an important source for him on fire-related news stories, and 
the fire chief outlined the facts surrounding the arson. Then Pizzo gradually 
pieced together the rest of the story. 

Residents in a prestigious hillside neighborhood above Santa Rosa had been 
jolted from their sleep by the dreaded sound of fire sirens one night in December 
1982. From their bedroom windows they had peered through oak trees at the 
glow of a fire that lit up the night sky as it destroyed a three-bedroom redwood 
home on Lower Ridge Road. When firemen arrived they had to pr\' open a 
locked security gate to get inside, and by that time the expensive home on the 
five-acre estate was engulfed in flames. Firemen found no sign that anyone was 
at home. Later, when questioned, neighbors told strange stories of a young 
couple named Miller who kept mostly to themselves, of limousines with darkened 
windows that came and went at all hours of the night, of Doberman pinschers 
that roamed the grounds. 

Arson investigators determined that someone had set the fire by dumping 
gasoline down the hall and stairs. They also discovered that before the fire 
someone had thoroughly ransacked the house. Walls had been torn open, floor- 
boards ripped up. Fire officials began a records search for the property's owner 
and they came up with Jenson and a company in Las Vegas, D.). Investments. 
Calls to Las Vegas turned up no D.J. Investments, so they phoned Jenson. When 
first asked if he were the owner of a home on Lower Ridge Road, he told arson 
investigators he was, but after being told the circumstances that led to the call, 
he quickly backed away from his earlier statement, saying that he had been 
mistaken, that he didn't have anything to do with the house. 

County arson investigators continued to sift through the charred ruins until, 
on the third day, federal agents suddenly appeared on the scene. 

"There were eight of us investigating the fire," recalled fire investigator Kevin 
O'Shea. "These feds called us together and told us our investigation was over. 
They told us to forget everything we had seen there, that as far as we were 
concerned, it never happened. They even told us to destroy any notes we might 
have taken. 'This never happened,' they said." At that point federal agents took 
over the investigation. 

Jenson continued to refuse comment and no fire insurance claim was filed. 
But an investigator told us they discovered a tantalizing clue in the rubble: a 
smoke-stained business card that simply read "Morrison Energy International, 
Dean Chandler, sales." On the back someone had penciled instructions on how 
to work the security gate. Investigators called the Santa Rosa phone number 
printed on the card and a secretary answered, "Lakewood Enterprises. " Lakewood 

$10,000 in a Boot • 43 

was Sid Shah's real estate company. Questioned by arson investigators, Shah 
disclaimed any intimate knowledge of Dean Cliandler or Morrison Energy In- 
ternational, saying only that he let Chandler use his phone number for messages. 
However, Pizzo discovered on a 1982 financial statement prepared by Shah that 
he owned "5,804 shares of Morrison Energy International stock, which he valued 
at $60 a share. Why was Shah trying to hide from investigators his involvement 
with Morrison Energy? 

Questions surrounding the 1982 fire at the Lower Ridge Road home grew 
as time passed but no answers were forthcoming. The house sat charred and 
empty. No one made a move to clean it or fix it. Occasionally federal agents 
would arrive at the scene and sift through the ashes. The home's former oc- 
cupants, the "Millers," had vanished. Neighbors in the tony neighborhood began 
to complain that the place was an eyesore. Their complaints finally forced 
Norman Jenson to come forward and assure them the property would be cleaned 
up. Who would be doing the work? 'Tiombo Construction Company," they 
said he told them. 

Going back again and again to his federal sources knowledgeable about 
Jenson, Pizzo learned that the burned house, the "Millers," Norm Jenson, and 
Sid Shah had become the center of a massive Organized Crime/Drug Enforce- 
ment Task Force investigation that had set up shop in the Federal Building in 
Santa Rosa. For five years a 12-agency team would investigate a $300 million 
international drug ring. Then the U.S. attorney would hand down an indictment 
alleging that the ring laundered its money through Sid Shah's and Norman B. 
Jenson's complex real estate deals. 

Jenson was the first red flag that went up for Pizzo. Then a second warning 
flag was raised when Pizzo learned that reputed Mafia associate Richard Binder 
had shown up at Centennial's loan window and had borrowed over $1 million. 
With Binder had been Dave Gorwitz, a fellow with a long criminal record and 
established Mafia ties. Gorwitz was also old friends with Paul Axelrod, according 
to mobster Jimmy "the Weasel" Fratianno, who described Axelrod as Morris 
Shenker's "banking expert." 

Binder's friend Gorwitz had pulled swindles on the West Coast before. In 
1975 Gorwitz had made San Francisco headlines when he was caught up in 
the high-profile prosecution of California State Senator Richard Dolwig. Dolwig 
had lent his name and influence to an advance-fee loan scam run by Gorwitz 
and David Kaplan, another minor hood.^ Kaplan turned state's evidence and in 
open court described Gorwitz as a muscleman for the mob. Other court testimony 
stated that Gorwitz was a financial advisor to Salvatore M. Caruana (described 
by federal officials as a highly placed organized crime figure with links to the 


Patriarca family).' Gorwitz, "Uncle Dave" to his friends, was convicted and 
served four \ears in prison, his second prison term. He had served time earlier 
on a counterfeiting conviction. 

After serving his sentence in the Dolwig case, Gorwitz headed for Massa- 
chusetts, where he became involved with Richard (Dick) Binder in a mysterious 
precious metals venture, the Bay State Gold Exchange, which later was the 
subject of a Boston Globe investigative piece. 

The Globe reported that Binder had started Bay State Gold Exchange in 
Plymouth, Nlassachusetts, outside Boston, with an $800,000 grubstake allegedly 
provided by mobster Salvatore Caruana. Along with the money, Caruana ap- 
parently sent trusted aide Dave Gorwitz to keep an eye on Garuana's new in- 
vestment and on Binder. Bay State Gold Exchange was supposed to be dealing 
in reclaimed gold and siKcr, but authorities said they believed Garuana used it 
as a vehicle to launder money from his drug operations. 

Three times a week, the Globe reported. Binder withdrew cash from a nearby 
bank, mostly in $20 bills. He \isited the branch over 100 times and withdrew 
$8. 1 million from Bay State's checking account in just 1 1 months. He stuffed 
it into a brown suitcase and left. Garuana would show up regularly to make six- 
figure withdrawals from Bay State's "petty cash" drawer, according to former 
Bay State employees. When precious metal prices crashed in 1981 so did Bay 
State, not long after a Bay State associate was found shot to death and stuffed 
in the trunk of a car. Federal investigators were interested in Binder's activities 
at Bay State by that time, but a fire at Binder's home destroyed all of Bay State's 

"Bay State emerged from the foam of the sea and dipped back beneath the 
waves," one investigator told the Globe. 

Binder and Gorwitz left Boston in a hurry after their little "enterprise" ended 
in the probing story in the Boston Globe. When Binder and Gorwitz emerged 
from the sea of foam to start a new life in Santa Rosa, they were immediately 
put under FBI surveillance. Nevertheless, Binder zeroed in right away on Cen- 
tennial. Hansen became a customer at Binder's newly opened Santa Rosa jewelry 
store, and in November 1982 Binder borrowed $5,800 from him, which bank- 
ruptcy records say he never repaid. Between 1984 and 1986 Binder also borrowed, 
and then defaulted on, over $'5 million from Gentennial and two other Northern 
Galifornia lenders. (Between 1984 and 1986 bankruptcy court documents showed 
Binder borrowed $385,000 from Bank of America, $1,151,000 from Gentral 
Bank of Walnut Greek, and $1,450,000 from Gentennial.)^ 

Gentennial might have lost even more to Binder and Gorwitz if a certain 
$6 million land deal had gone through. The pair had their eyes on five acres 
of land on the outskirts of Santa Rosa. Binder brought Gorwitz in as a "con- 
sultant," for which Uncle Dave was to get 25 percent of the action, according 
to later court testimony. A lawyer began a draft agreement but Gorwitz insisted 

$10,000 in a Boot ■ 45 

his name not appear on any of tlie documents, that instead liis interest be hidden 
in an offshore corporation. Suddenly the owners of the land backed out of the 
sale. Shortly thereafter federal regulators swooped down on Centennial and 
closed the thrift (in August 1985), and Binder declared bankruptcy and returned 
to the East Coast, his four-year stay in Santa Rosa abruptly terminated. 

The Gorwitz connection left little doubt in Pizzo's mind that organized 
crime figures, or people with ties to organized crime, were sucking money out 
of Centennial. 

While Erv Hansen was welcoming borrowers with questionable credit rec- 
ords, he was proving there was no end to the ways he could pull money out of 
little Centennial. In early 1984, soon after the fabulous Christmas party that 
had all of Northern California talking, the board of directors of Centennial 
announced that Shah and Hansen would receive kingly bonuses of $818,000 
each. The combined amount, $1,636 million, represented nearly two-thirds of 
the $2.6 million net profit Centennial claimed for 1983. 

Federal regulators would later learn that in reality the $2.6 million "profit" 
was an engineered illusion. Hansen had created $4 million in "profits" by 
"selling" to Atlas Savings and Columbus-Marin Savings Centennial's interest in 
some partnerships it held with Atlas and Columbus-Marin. The sales were 
reversed almost immediately in 1984, with Centennial buying the same interests 
back from the two thrifts and paying them a profit for their trouble. In other 
words, whatever profit Centennial made on the sale in 198? was wiped out in 
the buy-back a few months later. The deal fattened Centennial's bottom line at 
the end of 1983. This was the stuff bonuses were made of. 

But there was nothing phony about the $1.6 million bonus Shah and Hansen 
got. With bonuses and salary together, the two had each earned well over $1 
million after the first year together as a team at Centennial.'^ Understaffed reg- 
ulators had let Centennial go its own way for nearly two years, but the huge 
bonuses finally caught their attention and they dubbed them "excessive," stating 
that Hansen's compensation was five hmes that of any other thrift president in 
the FHLB's eleventh district.'' 

But even under the hot breath of angry regulators Hansen found a way to 
compound his larceny. In response to regulators' criticism of his bonus, Hansen 
called Centennial's board of directors together and told them that if his man- 
agement contract — which allowed him a salary of $100,000 a year plus a chunk 
of the profits (real or imagined) — was going to cause Centennial problems with 
the regulators, he was willing to renegotiate his contract. But first the board 
would have to buy out his old contract, and he wanted $350,000 for that. Hansen 
also demanded his salary be increased to $250,000 a year if he had to give up 
profit sharing. Like everything else Hansen proposed, his offer was accepted by 

46 • INSIDE )OB 

his board of directors. (A former chairman of Centennial's board explained the 
board's acquiescence by telling us that whenever the board opposed Hansen, he 
became furious and threatened to replace them with people who would do what 
he wanted, when he wanted.) 

Hansen's new contract, and the $350,000 he extracted from Centennial to 
set aside his old one, just added insult to injury and regulators hit the roof. Of 
course in 1984 "hitting the roof meant regulators wrote Centennial a letter and 
demanded that the board do everything possible to get Hansen and Shah to 
return some of their "excessive compensation " The board agreed but regulators 
later charged that the board made little or no effort to get the money back, and 
regulators soon had other matters to occupy their attentions. 

Hansen reveled in his new role as empire builder, even if those empires 
were built in the clouds. He formed a Centennial "hunting club " and purchased 
$500 shotguns for himself and his covey of rural groupies. He hosted a gala 
fishing expedition to Canada, bringing along his drinking buddies and Sheriff 
McDermott. After admiring a Western belt buckle he had seen on another high 
flier, Hansen had one made for himself Built into the gold-and-silver buckle 
was a small pistol that snapped out and could actually fire a .22-caliber bullet. 

No deal was too big or too small. During a slow afternoon one day, Beverly 
Haines, Hansen, and a business associate purchased a small, run-down rural 
house for $40,000. Documents on file at the county recorder's office told us the 
rest of the story. The same day the group bought the property they deeded it 
back and forth among themselves several times, each time raising the recorded 
value. (This maneuver is called a "land flip," and it is illegal if it is being used 
to defraud a lender. ) The final deed recorded was a trust deed securing an $80,000 
loan from Atlas Savings and Loan on the property. This little impromptu part- 
nership had spent a couple of hours signing documents and turned a $40,000 
purchase into a $40,000 profit. Kind of a "nooner," financially speaking. Nat- 
urally the loan went into default. 

On another occasion Hansen, Shah, and Dutch investor Neik Sandmann 
paid $50,000 for a two-thirds share of an old stone warehouse near the railroad 
tracks where bums jumped freights. County records showed they "flipped" the 
property among themselves and their partnership several times, raising the value 
each time, and capped off the transactions with a $487,000 loan, again from 
Adas Savings. Eventually they defaulted on the loan and regulators said Atlas 
had to sell the prop)erty at a considerable loss. 

Shah took an interest in mushrooms and he purchased a small mushroom 
farm near Santa Rosa, making Hansen and Haines partners in the operation. 
Hansen then had Centennial put $1.5 million into a large, bankrupt mushroom 
company in Washington state. Regulators claimed Shah's plan was to merge all 

$10,000 in a Boot ■ 47 

tlic iiuislirooiii operations into one and corner 80 percent of the West Coast 
market, but in 1984 he left Centennial holding the bag for $4 million in non- 
performing loans to the project and Shah ultimately placed his mushroom em- 
pire. Mushroom King, into bankruptcy. 

And just where were thrift examiners while all this frolicking in the vault 
was going on? Centennial should have been under scrutiny by both state and 
federal examiners because it was a state-chartered thrift and a member of the 
FSLIC. But the state examination staff had been decimated by the defection of 
thrifts to federal charters, and the numbers of examiners on the federal level had 
also been cut. In 1980, prior to deregulation, there had been over 700 federal 
examiners to cover the country's 4,002 thrifts. But deregulation was interpreted 
by Washington to mean there would be less need for regulation, and examiners 
had been cut to 679, even though the number of institutions in trouble had 
begun a sharp rise. 

"Haven't you heard of deregulation?" a frustrated regulator told Pizzo one 
day when he called to ask them why they weren't all over Centennial. "We 
don't supervise these institutions like we used to." 

Since frequent on-site examinations were impossible, regulators often relied 
on supervision by mail. Examiners would study records supplied by Centennial 
and fire back complaints. "We got dozens of these warning letters," Beverly 
Haines later told us. "They'd send us a warning letter on a deal or transaction 
they felt was unsound or a violation, and tell us not to do that anymore. Then 
they'd say that since it was already done, that at the very least we should go back 
and get the board of directors' formal approval for it." For well over three years 
that was the extent of the "punishment" handed out to Hansen et al. The 
demoralized employees who remained at the California Savings and Loan De- 
partment and Federal Home Loan Bank, after staffs were cut, were paralyzed. 
Higher up, in the policy-making levels of the regulatory apparatus, the reluctance 
of the system to admit it had a self-induced cancer was enormous. 

Hansen had his own way of appeasing regulators. He'd hire them. Pat 
Connolly, former state deputy savings and loan commissioner, became a Cen- 
tennial director, executive vice president, and managing officer in 1984. His 
job, in Hansen's mind, was to keep the staff at the state commissioner's office 
off Centennial's back, Haines told us. And he was paid handsomely for his 

"One minute Connolly was working for the state of California earning 
$40,000 a year," explained Haines. "Hansen hires the guy and suddenly he's 
pulling down $80,000 a year. In December of 1984, just two months after being 
hired, he gets another $40,000 bonus. All he had to do was calm the regulators 
down." (Connolly did not reply to our requests for an interview.) 

48 • INSIDE |OB 

Banks and savings and loans were required to have periodic audits of their 
activities. The audits liad to be done by recognized, qualified accounting firms. 
Centennial used, first, Alexander Grant^ and, later. Peat, Marwick, Mitchell & 
Co. But even though the FHLBB required an independent audit of thrifts, the 
tab for the auditor's services was paid by the thrift being examined. Furthermore, 
the law did not require the auditor to report irregularities to the FHLBB or law 
enforcement but only to thrift management. It was then up to the thrift officers 
to take corrective action or, presumably, to turn themselves in if they had broken 
the law. This policy resembled requiring a fire marshal to report to Nero that 
Rome was ablaze. (During our investigation we heard of several occasions when 
thrift officers would offer auditors kickbacks, gifts, or a high-paying job with the 
S&L in exchange for a clean audit. If the auditors refused to cooperate, the 
thrift would change firms.) 

"At Centennial an auditor for the independent auditing firm actually sat in 
on board meetings and helped them structure the Pioinbo deal [purchase)," said 
Haines. Later the auditor became a Centennial officer. Investigators told us 
Centennial eventually hired seven of its former auditors in a revolving-door 
pattern investigators said they found troubling.* 

With the money flowing at full force. Centennial generated an almost irre- 
sistable momentum about it. All who came within its orbit felt that force and 
many bent to it. Was Centennial the promise of deregulation realized? Or was 
it a hijacked thrift careening out of control? No one seemed to want to try to 
sort out the answer to that question during 1983 and 1984. Centennial appeared 
successful and powerful, a trend setter, and most people were content to climb 
on board and enjoy the exhilarating ride. 


The Downhill Slide 

Everything went Erv Hansen's way at Centennial for nearly two years. When 
anyone on Centennial's staff or board of directors dared challenge him, he flew 
into a fury of self-righteous indignation. He bragged, cajoled, and bullied his 
way through the months. With Beverly Haines running the money desk, brokered 
deposits and jumbo CDs poured into Centennial's coffers— and out the other 
end. Regulators alleged that Hansen, Shah, Sandmann, and others pumped that 
money off into projects of their own. For a time the examiners and auditors, 
who were supposed to ensure that precisely this kind of looting never occurred, 
seemed not to care. And their former colleagues, who were by that time working 
for Centennial, assured them all was well. 

But hiring former examiners and auditors wasn't going to keep Hansen's 
house of cards together forever, and by mid- 1984 he came under increasing 
pressure from regulators who began to make the kinds of noises that Hansen, a 
former regulator himself, knew preceded real action. Someone had to take the 
fall. Behind the scenes it was somehow agreed to lay the blame for Centennial's 
excesses on Shah. Hansen informed the feds that Shah was the problem and 
that Shah would resign. Stories were even floated in the local press that Hansen 
and Shah had had a falling-out. Shah told reporters he had private interests to 
pursue (mushrooms among them). He said he was not the corporate type and 
no longer fit in at Centennial. The truth, it was later revealed, was that regulators 
had required Centennial's management to sign a supervisory agreement in which 
they agreed to cease any dealings with Shah.' 

Shah's contract was terminated, but, like Hansen before him. Shah exacted 
a price for voiding his contract and, regulators said, took one more dip in 
Centennial's pool of liquid assets. Shah received $450,000 for his stock and 
$500,000 to buy out his employment contract with Centennial. FSLIC attorneys 
later charged Hansen arranged the stock purchase by inducing Centennial's 


50 • INSIDE |OB 

directors, whom the FSLIC would refer to later as "a rubber-stamp board," to 
buy Shah's shares. Under the scheme the directors would pay $60 a share for 
Shah's shares, $25 in cash and $35 in promissory notes. 

Hansen made Centennial lines of credit available to the directors in excess 
of the cash amount they needed to purchase Shah's shares. Regulators said the 
excess funds were intended as an incentive to the directors to participate in the 
scheme. The result was that Shah received $450,000 directly out of Centennial's 
coffers for his shares. Later the promissory notes signed by the directors/straw 
purchasers were "forgiven" by Shah, regulators charged, thereby relieving them 
of that obligation. The FSLIC claimed Shah's departure cost Centennial another 

Despite Shah's sacrifice on the regulatory altar, Hansen's life continued to 
get more complicated, even dangerous. In May 1985 Hansen, Haines, and Shah 
learned through Hansen's friend Sheriff Roger McDcrniott that two disgruntled 
former a.ssociates may have hired a hit man to deal with the trio. Haines said 
that on a spring evening in May, after dinner and drinks, McDermott took 
Hansen back to the courthouse and swore him in as a special Sonoma County 
deputy. He gave him a badge and Hansen began carrying two pistols for pro- 
tection. Deputy Erv was born. Hansen had a photo taken of his swearing-in, 
which he proudly hung on the wall behind his desk. As for the hit man, no 
one ever came forward. (After Centennial's collapse and the ensuing FBI in- 
vestigation, it was discovered that sheriff's office files referencing Erv's special 
deputy status and gun permit were missing. Sources within the department said 
that only a three-by-five, cross-reference card remained to show that a master 
file had ever existed. McDermott was not reelected as Sonoma County sheriff, 
quietly left office, and maintained his silence on these events.) 

For a while Hansen was successful in promoting the myth that all of Cen- 
tennial's problems had been cau.sed by the uncontrollable Sid Shah. Now, with 
him gone, Hansen said he was "trying to hold this thing together." But by late 
spring of 1985 Hansen was telling friends that he expected regulators to remove 
him from office — though not before he made one more valiant effort to hold 
off Centennial's day of reckoning. Regulators had told Hansen that, to avoid 
being declared insolvent. Centennial needed an infusion of $7 million. Un- 
deterred, Hansen had another rabbit up his sleeve. 

Centennial's wild ride had begun with its purchase of Piombo and, ironically, 
would end with its "sale." Hansen announced that he had found a buyer for 
Piombo, a buyer who would pay a whopping $25 million for the construction 
company, $12 million more than Centennial had paid for it two and a half years 
earlier, even though Piombo had been gutted of of its valuable real estate 
holdings during its short stay at Centennial. This "profit" would produce the 

The Downhill Slide • 51 

cash that regulators were demanding Centennial raise in order to stay in business. 
Here for the first time we ran into a tactic that nearly every thrift bandit we met 
would employ as a last desperate effort to ward off an FSLIC takeover — the 
White Knight. 

Pionibo's purported buyer was Sierra Diversified Investments (SDI), head- 
quartered in Shingle Springs, California. But when we tried to find SDI we 
discovered it had no phone listing or utility company accounts there. Equally 
mysterious were SDl's two principals, Dave Bella and Edward Blair. Sources 
inside Centennial complained to us that they knew little of the pair except that 
"we hear they are in the tire recapping business, or something like that." 

Not only did the mysterious company and its owners raise regulators' eye- 
brows, but the transaction's terms turned out to be a regulator's nightmare: SDI 
would pay only $100,000 in cash. The rest of the $5.75 million down payment 
was to be in the form of promissory notes and deeds. SDI agreed to make other 
cash installments of $2.6 million in four months and $1.5 million in eight 
months. Nineteen million of the $25 million was to be carried by Centennial 
as a ?0-year loan. 

Regulators sent no weak-kneed warning letters this time. Finally, enough 
was enough. They gave Hansen a clear, unmistakable order: Do not consummate 
the Piombo sale. But Hansen rushed the sale to completion anyway, quickly 
transferring Piombo to SDI. At the closing SDI put up $100,000 and in return 
got the keys to Piombo. They also got Piombo's bank accounts, which contained 
over $800,000, and Hansen extended $1 million in operating loans from Cen- 
tennial to Piombo's new owners. (Several weeks after Centennial was seized, 
FSLIC negotiators wrestled control of Piombo back from SDI, but not without 
additional cost. Since possession is still nine-tenths of the law, and since Hansen 
had given SDI possession of Piombo, the FSLIC had to pay SDI to let go. 
According to a source close to the negotiations, the tab was $300,000.) 

The Piombo sale was the final outrage. At 5 p.m. on August 20, 1985, a 
small army of FSLIC examiners, auditors, and private security guards stormed 
Centennial's branches. A representative of the Federal Home Loan Bank Board' 
walked up to Hansen, handed him a letter from Washington, and said, "Mr. 
Hansen, we are declaring Centennial insolvent. You are hereby removed as 
chairman of the board and president. Please give us your keys and do not touch 
anything on or in your desk." 

If there was ever a moment to call in one's lOUs, that was it, and that night 
Centennial's favorite congressman, Doug Bosco, announced from his home in 
Washington, D.C., that he was outraged by the Bank Board's action. He said 
that he was concerned for Centennial's shareholders and that he knew Hansen 
and considered him to be a kind, generous, and humanitarian man. He said he 
was going to personally investigate the Bank Board's seizure of Centennial. 

Bosco was just one of the first in a long line of congressmen and senators 


who would interfere with the regulatory process in the name of constituent 
service. Bosco was later forced to make an embarrassing public retraction when 
a group of consenative bankers threatened to withdraw their financial support 
for Bosco if he did not distance himself from the likes of Erv Hansen. A spokes- 
man explained their reasoning: "My feeling is that a legislator should ha\e all 
the facts before criticizing federal regulators. Centennial was a high-flying or- 
ganization that was headed for trouble for a long time." 

The headline in The Paper that week (the tabloid Hansen had gisen SSO.OOO 
to, as a "gift") read, "Centennial is dead. Long live Centennial." The paper ran 
an editorial that was a eulogy to Centennial written by the publisher. 

The day after the takeover Pizzo ran into Hansen in a bar that Beverly Haines 
owned in Guerneviilc, and they spent a couple of hours talking things over. 
Hansen showed none of the animositv' he had earlier displayed toward Pizzo. 
Now he wanted sympathy. Over a beer he sang the blues. 

"They came in and fired me," Hansen said. "One little punk looked me in 
the eye and said, 'Hansen, we're going to put a number on your back.' No, they 
won't, because I didn't do anything wrong." 

When the boom fell Centennial had swollen to $404 million in assets, a 
1,000 percent increase in just 32 months. Eighty percent of Centennial's $435 
million in deposits were high-cost brokered funds in certificates of deposit.'' The 
days following the takeover found regulators gasping in horror and disbelief, we 
were told, as they picked through Centennial's rubble. Thirty-six percent — $140 
million — of all of Centennial's outstanding loans were tied up in high-risk 
development ventures owned by Centennial's own subsidian' companies or cro- 

The feds immediately fired Haines and 14 of the thrift's officers. Centennial 
was dissolved as a privately held, state-chartered stock thrift and was converted 
to a federal mutual, an institution that is theoretically owned by its depositors 
and borrowers. At that instant $7 million in stock, owned by 300 stockholders, 
some of them Centennial's founders, became worthless. The day after the take- 
over Pizzo walked into Centennial's small Guerneville branch and found an 
elderly Centennial employee in tears. 

"1 should have known," he said. "1 invested every penny I'd saved for 
retirement — $50,000 — in Centennial stock, and now it's all gone. I'm too old 
to start over. I should have known. It's my own fault. 1 should have known 
when Hansen walked by me e\ ery day, never even shook my hand or said hello. " 

Centennial became known among federal regulators in San Francisco as the 
Eleventh District's "dirtiest thrift" — a reference to what they said they saw as a 
sordid and wide-ranging labyrinth of fraud and self-dealing. With every day that 
passed the magnitude of the mess mounted. Centennial was $36 million in the 

The Downhill Slide • 53 

red, then $60 million, $90 million, $1 12 million, and on it went. 'I'he further 
examiners looked, the more rot they found. I'here were loan files, for multi- 
million-dollar loans, that eontained no appraisals or other required documen- 
tation. The FSLIC "SWAT" team found the $48,000-a-year European chef on 
the payroll, the company plane that was costing $35,000 a month in tie-down 
fees and maintenance, and the San Francisco penthouse. They seized over 25 
company cars that ranged from Mercedes sedans to a stretch limo. And the $2 
million Stonehouse, filled with European antiques, still sat vacant on the out- 
skirts of town. 

Hansen retired to his $500,000 home in Santa Rosa while officials began 
sorting through the wreckage to determine if any federal laws had been broken. 
In a last-ditch effort to salvage his dream, Hansen filed suit against the FHLBB, 
charging that their seizure was precipitous and premature. The ease was soon 
dismissed and Hansen went back home to spend the next two years brooding in 
his Santa Rosa mansion. 

On the heels of the takeover an FBI investigative team, specialists in white- 
collar crime, arrived in Santa Rosa to investigate violations of banking regula- 
tions. Special Agent Pat Murphy, an accounting specialist, and his partner, 
Special Agent Ernie Cooper, an attorney, got the thankless task of unraveling 
thousands of pages of old loan documents, title reports, deeds, and loan appli- 
cations. There were a lot of unanswered questions, and, at that time, no one 
was talking. 

For ten months the investigation limped along with little progress. The deals 
were mind-bogglingly complex, and the chance of nailing someone for clear 
criminal activity began to seem remote. Then chance dropped a veritable Rosetta 
Stone right in the FBI's lap, and at 8 a.m. on September 3, 1986, Pat Murphy, 
accompanied by a woman FBI agent, knocked on the door of Beverly Haines's 
magnificent home in Guerneville. A sleepy Haines, still in her bathrobe, an- 

"Beverly Haines," said Murphy, "I have a federal warrant for your arrest for 
embezzling $1.6 million from Centennial Savings and Loan." 

Haines and an accomplice, who worked as the manager of the headquarters 
branch of Centennial in Santa Rosa (he had not been among those fired after 
the federal takeover), were taken into federal custody the same day. What was 
remarkable about the charges was that the money they embezzled was taken 
both before and after the federal seizure of Centennial, while the place was 
thick with federal auditors and FBI agents. Haines had become accustomed to 
having unrestricted access to Centennial's petty cash drawer, and after she was 
tossed out by regulators it hadn't taken her long to figure out a way to keep the 
money flowing. 

Haines, who had been the young branch manager's boss at Centennial, had 
convinced him to aid her in a complex check-kiting scheme.' Over $5.8 million 


was missing, though investigators said they could specifically tie only $1 .6 million 
to Haines. She had facilitated the complicated fraud by opening over thirty 
checking accounts at Centennial and Bank of America." Haines wrote checks 
for large sums of money— $145,000, $90,000, $125,000— on her Centennial 
accounts and deposited them at Bank of America. She then had Bank of ,'\merica 
issue her cashier's checks for like amounts, which she converted to cash. When 
Haines's checks came back to Centennial for collection, her accomplice ad- 
mitted, he sent the money to Bank of America but hid the checks in his desk 
or briefcase so there would be no record that Haines's accounts at Centennial 
were grossly overdrawn. 

Federal investigators could not say what Haines did with all the money, and 
though Haines provided detailed testimony on alleged wrongdoing by others," 
she remained vague about where her money was. 

"They just don't understand, " she told us. "It was all just kited checks, there 
really wasn't all the money they say there was." But she put those checks to very 
real uses. A workout specialist hired by the FSLIC to collect on bad Centennial 
loans said Haines even tried to pay off a $50,000 Centennial loan with a kited 

"She readily agreed to repay the loan when we confronted her with the 
demand," he said. "She was really gracious about it and wrote us a check in 
full. What we didn't know then was that she was kiting checks out of Centennial 
and so what she did was repay us with our own money. " 

Another place a goodly chunk of Haines's money went was into her home 
in Guerneville. From practically the day things began to roll at Centennial in 
early 1983 until well after the federal takeover in 1985, workmen and craftsmen 
worked day in and day out on the Haines home. They transformed a once modest 
summer cabin into a luxurious two-story, 3,000-square-foot home suitable for 
the pages of Architectural Digest. It had over a dozen handmade stained-glass 
windows, three fountains, an ele\ator, a tile workout room complete with sauna, 
electrically operated skylights throughout, a sunken hot tub in the master suite, 
Italian-marble showers with gold-plated fixtures, suede carpets, and hand-carved 
doors. There was even a vault to store furs. 

Haines began cooperating with the investigation almost immediately in a 
desperate effort to stay out of prison. Perhaps to inspire just such behavior, the 
assistant U.S. attorney in charge of the case, Peter Robinson, had Haines, 
following her arrest, held over the weekend in the Oakland County jail. Jail was 
definitely not Beverly's cup of tea, and when she was let out on bail, the feds' 
only problem was keeping up with the furious pace with which she began turning 
evidence against her former compatriots. She even agreed to give speeches to 
banking executives about bank fraud. 

Haines's arrest and decision to turn state's evidence was a severe blow to 
Hansen. Acquaintances .said his normally cocky, self-assured demeanor gave 

The Downhill Slide • 55 

way to an increasingly sullen mood. A heavy drinker, he now indulged even 
more." Finally, one night in early 1987, he showed up at Community Hospital's 
emergency room with what was reported to be a self-induced drug overdose. 
With Haines talking to the feds, and his attorney advising him not to be 
seen talking with Sid Shah, Hansen felt isolated and sent tentative feelers out 
to the federal authorities to see if he, too, could cut a deal. The question was 
met with stony, ice-cold silence, investigators told us. The U.S. attorney wanted 
to sweat him out while the FBI debriefed Haines. Four months after the first 
suicide attempt, Hansen was rushed to the emergency room a second time. 
Friends had found him unconscious in his car, in the garage, with the engine 

After being stabilized Hansen was transferred to Oak Crest mental hospital 
on a mandatory 72-hour hold. This time federal investigators decided they had 
better talk to their prime suspect since he seemed to be going to extraordinary 
lengths to get their attention. Assistant U.S. Attorney Peter Robinson, an FBI 
agent, and a psychologist met with Hansen at Oak Crest. It was then that Hansen 
was given a description of the kinds of charges that would be brought against 
him. Some 26 in all were contemplated, including charges that he had embezzled 
at least $872,000 from Centennial between 1982 and 1985. The investigation 
had revealed that Hansen had routinely used his institution's funds to fuel his 
own extravagant life-style, taking $20,000 here, $25,000 there, $55,000 for 
antiques, $137,500 for jewelry, $80,000 for his taxes, $85,000 for cars, $25,000 
for art, $45,000 for a vacation . . . and on and on (according to documents we 
obtained through the Freedom of Information Act). He had arrogantly used 
Centennial's treasury as his own personal petty cash drawer. 

Hansen was released from Oak Crest and went home to resume waiting for 
the FBI to contact him. In the months that followed federal agents continued 
to debrief Haines and went right back to giving Hansen the official cold shoulder. 
They also handed down 17 indictments of mostly minor figures in the Centennial 
daisy chain. 

What was left of Centennial was now in the hands of a crack management 
team from Great Western Savings and Loan, appointed by the FSLIC. In one 
final irony, on January 26, 1987, 18 months after regulators took over Centen- 
nial, the FHLB of San Francisco issued a confidential memorandum addressed 
"To the Board of Directors, Centennial Savings and Loan." The memorandum 
warned sternly, ". . . you may have found evidence of fraud and criminal 
collusion by and between former officers, directors, and outsiders, including 
professionals such as appraisers, and lawyers. You as directors have an obligation 
to review such acts for possible referral to a local prosecutor, or the United States 
Department of Justice." By that time, of course, the Justice Department probe 
was well under way and the crooks were long gone. So, for any practical purposes, 
was Centennial. 


Golden Pacific Savings and Loan was seized a month after Centennial, in 
September 1985.'' Leif Soderling, the older of the two Soderling brothers, had 
resigned as president in February, saying, "I don't want to be in the savings and 
loan business. It's got a lot of regulations and 1 don't want to learn them." His 
resignation didn't help him avoid trouble, however. In March 1987 he and his 
brother, Jay, were charged with loan fraud in connection with a complex series 
of land transactions that had netted them $10 million from their own thrift. The 
brothers pleaded guilty and were sentenced to one year in prison and ordered 
to pay restitution. (Critics of the lack of consistency in sentencing pointed to a 
front-page newspaper story about the Soderlings' sentence. On that same front 
page was news of another sentence, that of a man who had held a friend's parrot 
for ransom and received seven years in prison for the extortion attempt. The 
juxtaposition of the two stories led one disillusioned FBI agent to quip bitterly, 
"Use a parrot, go to jail.") 

Contributing to the Soderlings' light sentence was an eloquent presentation 
by the prosecutor. Assistant U.S. Attorney Robinson, who described the brothers 
as two young men who "did not intend to establish the savings and loan for the 
purpose of ripping it off' but simply took the wrong fork in the road. During 
the hearing an attorney for the FSLIC repeatedly implored the judge to take a 
stronger stance with the two brothers, saying that evidence indicated that the 
pair had secreted some assets away and transferred others to third parties in order 
to hide them from investigators. The judge asked the U.S. attorney if this were 
so. Robinson replied that his agents had not conducted any search for secreted 
assets. (In March 1989, just months after the two brothers got out of prison, 
another U.S. attorney would accuse them of secretly receiving payment on a 
$800,000 note and spending most of the money on thoroughbred horses, a home 
computer, and car phones, in violation of probation, which required that any 
money they acquired be used for restitution. The brothers denied the accusation 
and the matter was pending as of this writing. The court had reshicted the 
brothers to a living allowance of $2,500 a month for themselves and their 

In February 1988 the FSLIC filed a $10 million civil suit against the brothers. 
The FSLIC claimed they had manipulated substantial assets in order to defraud 
the FSLIC. Evidently the FSLIC didn't buy the Soderlings' tale of woe that Jay 
had a minus net worth of $1.5 million and Leif a negative net worth of $1 
million. The FSLIC also filed a $100 million civil suit against Centennial's 
former directors and a number of former executives. And to round out the group 
the FSLIC filed a similar $50 million suit against several former Columbus- 
Marin Savings and Loan executives. "* 

The Downhill Slide • 57 

From information provided by Haines, investigators were finally able to 
develop a solid case against Hansen. Investigators said they hoped that, once 
faced with the sobering reality of a multicount grand jury indictment and years 
in prison, Hansen would give them the evidence against Shah. 

Nice idea, and it might have worked. Except that time ran out for the FBI 
when, on July 30, 1987 — two years after the feds took over Centennial and just 
one day before Hansen was to enter into negotiations with the Justice 
Department — Hansen, 55, was found stone dead in bed. Nearly everyone sus- 
pected suicide or foul play, so the coroner gave the case special attention. The 
official report: Hansen had died of a cerebral aneurysm. A blood vessel on the 
right side of his brain had burst while he slept. 

A pall fell over the sordid Centennial story after Hansen's death. Shah was 
the only major player left unscathed. He had boasted in the newspapers, through 
his high-powered lawyer, that he was guilty of nothing more than taking ad- 
vantage of good business opportunities. Sure, he'd made a lot of money. What 
was wrong with that? 

But quietly, behind the scenes, the multiagency investigation into the De- 
cember 1982 fire on Lower Ridge Road had continued. Then suddenly, on 
October 5, 1987, special agents Pat Murphy and Ernie Cooper met Sid Shah 
as he was leaving his Sonoma, California, home — the opulent Spreckles man- 
sion, of sugar fame — and hauled him off to appear before a federal magistrate 
in San Francisco. The grand jury had indicted Shah, accusing him of being 
part of an elaborate $300 million international drug-smuggling and money- 
laundering operation that imported marijuana, hashish, and cocaine from Mex- 
ico, Morocco, Colombia, and Thailand and that had done the bulk of its business 
between 1979 and 1985. Shah denied the charges. The ring was headed, the 
indictment said, by Ronald Stevenson, alias Ronald Miller, who had lived in 
the expensive Lower Ridge Road house with his wife and child at the time it 
was torched. Investigators speculated he had since been murdered in Mexico. 

"Sid Shah Indicted" roared the headlines. Santa Rosa buzzed with the news. 
The indictment, drafted by the federal Organized Crime Drug Enforcement 
Task Force, charged that Shah, Las Vegas attorney Norman Jen.son and others 
had laundered the drug proceeds through a complex web of real estate projects, 
including some connected to Centennial Savings and Loan and Piombo Cor- 
poration. At Shah's bail hearing a prosecutor cited Shah's recent trips to Am- 
sterdam to meet with Sandmann as reason to fear that Shah might flee if released 
from jail before the trial. Nevertheless the judge ordered Shah released on 
$500,000 bail." (The case was pending as of this writing.) 

Unbeknownst to Shah, during the lengthy inquiry federal investigators had 
secretly recorded a meeting and phone calls between Shah, Norm Jenson, and 
Ronald Stevenson's brother, Michael. Shah, Jenson, and Stevenson discussed 


ways to best deal with the grand jury, which had subpoenaed records of their 
complex real estate transactions. The transcript of the meeting showed Shah 
reassuring the others: 

"You don't have to worry 'bout me saying anything. Where the money was 
coming from, don't worry about that part of it if anything could hurt you guys." 

Members of the drug ring began to talk, and transcripts of the interrogations 
show they told investigators that Norman Jenson, the man who had done millions 
of dollars' worth of business with Piombo, was at the very center of the high- 
rolling, international drug operation. One informant, William Olof Henrickson, 
told the FBI that Jenson had "mob " affiliations. A confidential DEA source said 
Jenson owned his own freighter, which prowled the waters from South America 
to Oregon. The informant told investigators that Jenson complained that the 
freighter was stuck in South America because it was being watched by the feds 
and that Jenson was willing to pay $1 million to anyone who would pilot it back 
to the United States. Transcripts showed investigators were also told that Jenson 
held drug kingpin Ron Stevenson's properties in his name and in the names of 
various shell corporations, and that Jenson used his own Coos Bay, Oregon, 
marina as an importation point for millions of dollars' worth of pot and cocaine. 
An FBI agent said he was told Jenson had placed the drug ring's vast fortune in 
safe havens in Switzerland, the Bahamas, Panama, and Thailand, once with 
the help of a Swiss consul general and once with the help of a Thai embassy 
employee in Los Angeles. 

One technique used by Jenson to launder all this high-temperature money, 
a source in prison told us, was to purchase expensive property with a cash down 
payment and take out as large a loan as possible on the property. Jenson could 
then make the monthly payments on the loan with drug proceeds. The interest 
he paid on the loan he simply considered to be the cost of cleaning the 
money — the laundry bill. Jenson associates, including Henrickson and Michael 
Stevenson, told investigators that 50 percent of the Lakewood Hills development 
had been financed by Stevenson's drug proceeds. 

How much did the ring launder through Lakewood Hills? an investigator 
asked Henrickson. 

"Haifa billion [sic] at Lakewood Hills, I think. " he replied. "That's what 
he [Ronald Stevenson] told me one time. Five hundred thousand dollars." 

A county politician had eased the paperwork for the Lakewood Hills devel- 
opment through the county bureaucracy, he added: 

"They had the politician in their pocket, one of 'em, you know. And they 
could get permits through him and shit like that. " 

Later Centennial bought Lakewood Hills, thereby cashing out the asset for 
Jenson and the others. 

A raid on Jenson's offices in Las Vegas netted investigators a treasure trove 
of documentation on Jenson's far-flung enterprises. An in\entor\' of items taken 

The Downhill Slide • 59 

in that search included paperwork on various real estate transactions allegedly 
used to launder drug money (including files on Lakewood Khlls and Jcnson's 
deals with Piombo Corporation) and numerous plastic bags and bottles containing 
"green leafy substances, and white powders and white powder residues" (ac- 
cording to the FBI receipt for property received). 

With such damning evidence in federal hands, Jenson agreed to cooperate 
with the government in its investigation of the drug ring, Sid Shah, and indi- 
viduals at savings and loans in Texas, Washington, and Louisiana. In return 
Jenson sought and received partial immunity from prosecution. Then, just before 
the drug trial was scheduled to begin, informant Michael Stevenson disappeared. 
The drug case was pending as this book went to press. 

At this point the wind went out of the Centennial criminal investigation. 
The feds' technique of sweating out Hansen had blown up in their faces, and 
now that he was dead. Assistant U.S. Attorney Peter Robinson announced he 
was going into private practice to become a defense attorney, and the FBI had 
to scale back its investigation.'- After 12 years as a federal prosecutor, Robinson 
would now defend clients accused of some of the same kinds of crimes he had 
formerly prosecuted. In an article he wrote for a legal publication he said his 
new clientele gave him something he had not found as a prosecutor: 

. . . the feeling I have experienced as a defense lawyer getting a dismissal 
for a client is euphoric — and addicting . . . the gratitude for helping one 
real person is much greater than I received as a prosecutor helping the public 
. . . my days as a champion of the underdog have just begun. It is a daunting 
challenge. But I already fee! at home. 

In a final twist of irony, Robinson revealed that his new offices would be 
located in Centennial's former executive quarters, the Stonehouse. 

With his departure the Centennial investigation lost its drive and dribbled 
to a close. Beverly Haines went off to Giger Correctional F'acility in Spokane, 
Washington, to serve a five-year sentence for embezzling $1.6 million from 
Centennial, but in two months she was out, released by Judge Robert Peckham 
to a halfway house in San Francisco to perform community service and serve 
three years' probation. She was allowed to go home on weekends. 

Centennial, born in 1977, finally passed completely from sight in April 1987 
when its garments were divided between the FSLIC and Citizens Federal Savings 
and Loan of Miami, which paid only $8 million for what was left of Centennial's 
"goodwill" and for the right to operate an interstate network of thrifts that would 
have branches in Florida and California (interstate banking was forbidden except 
when it suited regulators' needs)." In less than five years, from December 1980 
to August 1985, when federal regulators took over the thrift, over $165 million 
vanished, and no one ever served more than a year in prison for the theft. '^ In 


1985 there were 5,995 bank robberies in the U.S. that involved a total loss of 
$46 million." But at Centennial alone the heist netted $165 million. 

By the time Citizens Federal bought the remnants of Centennial in .April 
1987 we were well into our investigation of failed thrifts coast to coast. We had 
decided in December 1986 that the evidence Pizzo had collected at Centennial 
was too compelling to ignore. We knew we were onto an important storv'. The 
strategy we adopted was to approach our investigation in the same way an 
epidemiologist would track a spreading virus. We took a random selection of 
failed thrifts across the countrv' and examined each to see if we found common 
elements in their deaths. We had a theorv' to pro\e or disprove: that "bust-outs" 
and other forms of orchestrated fraud were underlying the sudden crisis in the 
thrift industrv'. Pizzo and Fricker would work out of an office in Guerneville; 
Muolo, out of the National Thrift News office in New York. We spent over two 
years on the investigation, years in which we collected bits of information every 
day that expanded our understanding of the puzzle we were piecing together. 
In the process we imcovered a cast of bank-fraud artists that were working every 
single savings and loan we examined. The interwoven relationships astonished 
even us, and by the time we completed our in\estigation, in June 1989, our 
original hypothesis had been eclipsed by the reality we discovered: deregulation 
had unleashed a holocaust of fraud upon the thrifts it had been designed to save. 



When the California legislature deregulated state-chartered thrifts in order to 
stem the flow of state thrifts to federal ciiarters after Garn-St Germain passed, 
it virtually threw the rule book out the door and made California thrifts irre- 
sistible. In one important provision the legislature decreed that a savings and 
loan could invest or loan 100 percent of its assets in real estate,' and it set no 
standards for the type of property or the qualifications of the borrower. Suddenly 
the state was so flooded with applications for thrift charters that almost anyone 
who could prove he had the $2 million required as start-up capital got the nod. 
Bv 1984 it was easier to get approval to own a California savings and loan than 
it was to get a casino license in neighboring Nevada. As a result some people 
who might not have qualified to run a casino in Nevada got thrifts in California 
instead and ran them like they were casinos. 

Toward the end of our Centennial investigation a source close to the Sod- 
erling brothers slipped us a copy of a letter the pair had prepared as part of their 
plea bargain negotiations with the FBI. The letter outlined what the former thrift 
owners agreed to tell the feds in return for a soft sentence. Near the end of the 
letter was a cryptic reference to "Robert Ferrante and Consolidated Savings and 
Loan. ..." We asked one of our FBI sources who Robert Ferrante was; we'd 
ne\er run across the name and the Soderlings' letter did not explain further.- 

"Ferrante . . . huh, there's one you should look at," our source told us. 
"He's a good example of the kind of business person California's new thrift laws 
let into this business. You won't believe it. Go on down to L.A. and look in 
the court records . . . that's all I can tell you." When we did research Ferrante 
we discovered all that the FBI agent had promised and more. There was no 
shortage of colorful information on Mr. Ferrante, in both public records and 
the local press. He had first made headlines in 1982. 

It was late on a Monday night, April 12, 1982, when Robert Ferrante and 



his trusted aide Raymond Arthun decided to call it a day. They locked up their 
office in the Brookside Village condominium conversion project in Redondo 
Beach, California, on the outskirts of Los Angeles, and walked to their cars in 
the dimly lit office parking lot. Arthun stopped at his car and Ferrante continued 
down three spaces to his. 

Suddenly Arthun heard a noise. Looking up he saw a man with a sock over 
his head leap from behind a bush in front of Ferrante's car. The man ran up 
to within a few feet of Ferrante and opened fire on him with a .22-caliber 
semiautomatic pistol equipped with a silencer. Ferrante screamed for help but 
the would-be assassin continued his work with polished precision, even coming 
closer to fire a few last shots into Ferrante as he crumbled to the pavement. 
Then the gunman walked briskly out into the parking lot, where he was picked 
up by a waiting tan Toyota hatchback. 

But Robert Ferrante was not to be killed off that easily. Miraculously, of 
the nine rounds fired, only four hit their mark and only two caused any serious 
damage. One passed through Ferrante's left thigh and a second lodged in his 
chest. The police report showed he told police he knew who had shot him, but 
he refused to give them the identity of the attacker. Later, in a sworn declaration 
filed in connection with a partnership gone sour. Ferrante claimed he had been 
targeted by two former business partners with ties to the Israeli Mafia.' 

Less than two years after he lay bleeding from a hit man's bullets, and while 
he was publicly involved in a tangled web of civil lawsuits as well as a criminal 
case involving bribery of a public official, Ferrante was granted a charter from 
the State of California, and approved by the Federal Savings and Loan Insurance 
Corporation (FSLIC), to open his very own savings and loan. 

What a perfect example of how the once-conservative thrift industry had 
changed, we thought. Old-line thrift owners would have been horrified to have 
someone like Ferrante as a colleague, almost as horrified as Ferrante probably 
would have been to be stuck in such a boring occupation. But now would-be 
tycoons like Ferrante were welcome in the savings and loan industry . . . and 
S&Ls were no longer boring. Far from it. 

Robert Ferrante, an attorney, liked to describe himself as a product of blue- 
collar working-class parents, a hard worker who grew up near Los Angeles and 
put himself through college and law school. His brother, Rocco, described him 
as "one hell of an entrepreneur." Detractors called him a "little arrogant Na- 
poleon." He was short — about five feet seven — trim and handsome, and he 
exuded the polished corporate image. 

In 1972 Ferrante, then 24, married the daughter of wealthy San Fernando 
real estate developer Chester Anderson. Anderson owned and operated Day 
Realty and Day Escrow Company, with 20 offices and 1 , 500 employees in the 
Los Angeles area. Ferrante immediately became a partner with his father-in-law 
and the two began investing in condominium conversion projects together. But 

Lazarus • 63 

the bloom later faded from the family rose and by 1979 Chester Anderson was 
suing son-in-law Ferrante and two Israeli businessmen who were partners of 
Ferrante in other projects. Anderson alleged in his suit that they had used his 
company as though it was their own. The judge agreed, ruling: 

"It is clear that the defendants used large sums of Condor Development [the 
Anderson-Fcrrante company] money, directly and indirectly. . . . They also 
used the credit of Condor Development by pledging proceeds from the sale" of 
its projects to guarantee a $1.3 million loan for projects of their own. 

The judge also disclosed that Ferrante and his partners had even tried to 
handicap Anderson's attempt to recover the missing funds from them. "The 
defendants upon being served with the complaint herein decided to take $540,000 
of corporate funds which they believed was owing [sic| to Chester Anderson, in 
order to prevent him from using that money to finance his lawsuit against them." 
The suit was an ugly family affair and got plenty of press in Southern California, 
but apparently state regulators missed the stories. 

Ferrante's feud with his father-in-law didn't get in the way of his relationship 
with his two Israeli partners. The three men continued to do condo conversions 
together until they had a falling-out in 1981 and Ferrante went to court to have 
their partnership dissolved — on his terms. (The suit was later settled out of court.) 
Angry accusations flew back and forth. In April 1982 the masked assassin am- 
bushed Ferrante, and a month later he went to court to demand a protective 
court order to keep his two former partners away from him. 

Ferrante testified that he believed he was the target of an Israeli hit man to 
whom his two former partners had paid $25,000 to kill him. lie told the court 
that he was repeatedly warned by the pair that they were going to kill him. 

"I can recall over 30 threats in the 22-day period prior to the actual assas- 
sination attempt on my life," Ferrante told the court. Employees at Ferrante's 
office corroborated his contention that someone was out to get him. Robin 
Bohannon told the court that in November a man had stormed into the office 
looking for Ferrante. 

"Where's Robert Ferrante? I'm going to break his head, and Ray Arthun's 
too." Bohannon said the man kept yelling that he had a gun and was going to 
use it on Ferrante and Arthun. (In 1987 Ferrante's then ex-wife would tell Los 
Angeles Times reporters, "It was and still is my husband's policy to take extreme 
risks with money, even to the point of nearly being murdered because of its 

Despite Ferrante's accusations against his former business partners, and en- 
suing police and private investigations, no one was charged with the attempt on 
Ferrante's life. And despite the wide publicity accorded the events surrounding 
the shooting, Ferrante's reputation was evidently not sufficiently damaged to 
make regulators later question his suitability as an S&L owner. 

But there was still more, we found. Ferrante made headlines again in May 


1983 when the United States attorney indicted former Redondo Beach, Cali- 
fornia, City Councilman Walter Mitchell, )r. , for allegedly taking bribes from 
Ferrante to gain city approval in 1979 for Perrante's Brookside Village condo 
conversion project — where Ferrante was shot in 1982. Voters recalled Mitchell 
in 1980 after a public row and a series of newspaper articles on the controversial 
condominium conversion issue. 

Mitchell, a slight man in his thirties, pleaded innocent. But during his three- 
day trial in 198? witnesses told the jury that Mitchell himself had said he was 
being paid by Ferrante to get approval for the Brookside Village project. Under 
the alleged Brookside Village scheme, Mitchell, a painting contractor by trade, 
received lucrative painting contracts on Ferrante-owned construction projects in 
return for his help with the cit>' council, the prosecutor charged.^ The jury 
convicted Mitchell of mail and tax fraud and sentenced him to a year and a half 
in prison. (In 1988 Mitchell's mail-fraud convictions were overturned on appeal 
when the court ruled that officials could be convicted of mail fraud only if the 
fraud cost the government money or property. The tax-fraud conviction was 

To the end Mitchell denied he had accepted bribes from Ferrante, and the 
district attorney dropped that aspect of the investigation. Later, FSLIC investi- 
gators learned. Consolidated made $52,000 in loans to Mitchell's wife while her 
husband quietly served his sentence. And when Michell got out of jail, he went 
to work for Ferrante in Hawaii, according to exhibits filed in a FSLIC lawsuit 
m 1988. 

Ferrante's problems did not occur in private. We found \olumes written on 
his exploits, both in public records and in the press, but apparently none of this 
verbiage had filtered up to the green eyeshades of state and federal regulators 
when, in 1983, Ferrante applied for a state charter for his own savings and loan. 
Regulators may not have heard of him, but he had certainly heard about de- 
regulation and he now wanted his own S&rL. The processing of Ferrante's 
application for Consolidated Savings Bank proceeded without a hitch, thanks to 
California's new ultraliberal savings and loan regulations passed just that year.' 

So at the very time that Ferrante's relationship with Redondo Beach City 
Councilman Walter Mitchell was being investigated and openly discussed in the 
press during the Mitchell trial in May 1983 — prompting a public rehashing of 
the 1982 murder attempt on his life and the 1979 lawsuit filed against him by 
his father-in-law — Ferrante's application to run his own thrift sailed through the 
application process. Even Ferrante's application for FSLIC insurance coverage, 
a separate step requiring federal approval, progressed uneventfully. Federal Home 
Loan Bank Board spokeswoman Martha Cravlee later explained that FBI checks 
of prospective thrift or bank owners might turn up prior criminal convictions but 

Lazarus • 65 

would reveal nothing on current investigations, and Ferrante had never been 
convicted of anything. 

Ferrante's apphcation was a perfect example of one government hand not 
knowing what the other hand was doing. "I'he U.S. attorney had subpoenaed 
every document in my office with Ferrante's name on it," recalled one senior 
loan officer in Southern California. "That was at the same time the state and 
the Federal Home Loan Bank were considering his application for a savings and 
loan and FSLIC insurance. Somebody wasn't talking to somebody else." 

Ferrante later said of the approval process, "I assumed they checked me out 
thoroughly." Not so. 

The California Savings and Loan Commissioner's office approved Ferrante's 
application in May of 1983. At the dawning of 1984 Consolidated also received 
the blessing of the Federal Home Loan Bank Board when, after the FHLBB's 
"investigation," it approved Ferrante's new thrift for FSLIC insurance. The next 
day, February 28, 1984, Consolidated opened its doors for business. Ferrante 
now owned his own money machine. He would serve as chairman of the board 
until December 7, 1984, whenhegavethatposition tobankcrOttavio A. Angotti. 
Ferrante would remain the sole stockholder throughout the thrift's short life. 

Consolidated Savings Bank's offices first were located in a shopping center 
in Brea, about 30 miles east of Los Angeles. "It was basically a post office drop, 
a storefront, not like a real bank at all," recalled a reporter who covered the 
opening. Eighteen months later Ferrante would move his bank to Irvine, in 
Orange County, 30 miles south of Los Angeles, into a fancy three-story building 
in Douglas Plaza, adjacent to Orange County's John Wayne Airport. 

Firmly in the saddle, what Ferrante needed now was to fuel Consolidated 
with deposits as fast as he could. Like Erv Hansen at Centennial, Ferrante turned 
to deposit broker Mario Renda and First United Fund, even though Consoli- 
dated's application for a savings and loan charter had said Consolidated would 
be a hometown thrift filled with passbook savings accounts. But passbook savings 
were small and took time to build up, whereas brokered deposits came with a 
phone call and gave thrifts all the money they wanted when they wanted it. An 
FHLBB examination revealed that 16 months after Consolidated Savings opened 
for business, 70 percent of its savings deposits would consist of brokered and 
jumbo ($100,000) certificates of deposit, much of it from Mario Renda's First 
United Fund. 

With the brokered deposits rolling in. Consolidated had all the money it 
needed. Regulators later complained that Ferrante bellied right up to his own 
loan trough to get some of those deposits for his own projects, the largest of 
which was a 157-acre landfill at the southern edge of Los Angeles called the 
Carson landfill. Years earlier the property had been a dump for the city, and 
the state considered it a toxic waste site. Nevertheless over the next few months, 
according to an FSLIC lawsuit, Ferrante would arrange to have Consolidated 


loan just over SH million on the propcrt)' through a confusing maze of com- 
panies he had formed and controlled. Many of the Carson loans were obscurely 
noted on Consolidated's books as simply "sundry debit items,"'' federal examiners 

Ferrante's right-hand man at Consolidated was its president, Ottavio Angotti, 
who had been born and raised in Italy and who had come to the U.S. in 1957. 
He still spoke with an Italian accent and when angry sometimes slipped into 
Italian. It was Angotti who was left to do battle with suspicious examiners wanting 
to know where those several million dollars in "sundrN' debit items" were going 
and what interest Ferrante had in the Carson project. When we interviewed 
Angotti by phone two years later, he told us he hadn't been hiding anything 
from anybody. 

"The examiners, both state and federal, were auditing the bank at the very 
time we were doing this," Angotti said, his Italian accent growing thicker with 
each angry word. "They saw all those debit items. How can they say we were 
trying to hide anything?" 

The $15 million Carson loans only slightly exceeded regulators' $100,000 
limit on unsecured commercial loans to affiliated persons and also immediately 
put Consolidated Savings in violation of the loans-to-one borrower regulation, 
regulators claimed. (The Carson loans, according to FSLIC reports, were three 
times Consolidated Savings' reported net worth and consumed a quarter of its 
deposits.) Despite the $15 million that was headed into the Carson project, 
Ferrante never developed the property," maybe because of its continuing problem 
as a toxic waste dump. 

Perhaps anticipating the wrath of regulators, Ferrante decided to "participate 
out" (sell) some of the Carson loans to other institutions.* Ferrante arranged 
these participation deals with United Federal Savings and Loan of Durant, 
Oklahoma, and Savings Investment Service Corporation (also known as SISCorp) 
of Oklahoma City, a loan brokerage firm.' The key figure in Consolidated 
Savings' deals with United Federal Savings and SISCorp was Charles Bazarian 
of Oklahoma City. Bazarian was described by one former savings and loan 
executive who knew him well as "an original piece of work. " 

In Charlie Bazarian we came face-to-face with one of the most active con 
artists working the thrift circuit coast to coast. As our investigation progressed 
we were stunned by the number of times we would be sifting through the ashes 
of a failed thrift and come across a Bazarian deal. 

Bazarian was not an Oklahoma native. He was a Connecticut Yankee, the 
son of an Armenian immigrant produce salesman. Charlie was a living caricature 
of a tycoon, an obese, gregarious fellow, five feet nine inches tall, 245 pounds, 

Lazarus • 67 

who eventually had to have quadruple heart bypass surgery. He chewed expensive 
handmade cigars and had never bothered to clean up his nialapropisnis and bad 
grammar. He and his wife, )anice Lee Bazarian, were well-known figures in 
Oklahoma City society. Friends said Charlie had a need to associate with the 
great and near great. On one occasion the couple arranged for their friend Las 
Vegas entertainer Wayne Newton to perform free at a benefit for their favorite 
charity, a rehabilitation center for the mentally handicapped. On another oc- 
casion former heavyweight boxing champ Muhanmiad Ali, who was visiting for 
a few days at the Bazarians' home, stopped by the center and signed autographs 
for the patients. 

Charlie and Janice were great party givers. Every year Bazarian, whom friends 
had nicknamed Fuzzy, threw an elaborate birthday party for his son, nicknamed 
Buzzy. Buzzy, born in 1982, was only a baby, but the guest list was a Who's 
Who of Oklahoma City. One year Fuzzy, in Buzzy 's honor, had an entire circus 
set up on the vast lawn of his 19,000-square-foot, $2.4 million mansion. At one 
end of this lavish spread the Bazarians reportedly had an indoor swimming pool 
with a retractable dome ceiling and a waterfall. The Bazarians listed as assets art- 
works worth $100,000 (including one jade boat appraised at $65,000), $775 worth 
of exotic fish, and a $60,000 Rolls-Royce Camrogue. Bazarian had a Rolex watch 
(gold with diamonds) worth $15,000 and an economy duplicate worth $1,000. 
Janice had a go!d-nugget-and-diamond pendant that cost $1,500 and Charlie 
countered with his $1,500 sapphire-and-diamond cufflinks. But the rca/ Charlie, 
we speculated, was the $1,700 gold-and-diamond oil-well belt buckle. 

For someone living such an exalted life-style, Bazarian had a most unlikely 
history. He quit school after the eighth grade. In the 1960s, already the father 
of three children, he moved his family to Oklahoma and worked as a restaurant 
cook. Later he got into the insurance business and by 1977, when he was 37, 
he had his own insurance company. 

"He couldn't do enough for his family," a brother-in-law told a reporter. 
"He would give you the shirt off his back." 

Well, maybe. But his generosity didn't extend to his clients. In the 1970s 
he and associates set up an insurance company that agreed to pay up to $1 
million in lifetime medical benefits to clients who paid the $30 membership fee 
and the monthly insurance premiums, but no one ever bothered to set aside 
any money to pay the medical claims. In 1978 he pleaded no contest to felony 
charges of mail fraud. Prosecutors charged that he and his cohorts bilked 700 
farmers and ranchers out of more than $347,000 in fees and premiums. Bazarian 
was sentenced to four years in prison, which was reduced to four years' probation 
in exchange for his testimony against his partner, who was convicted and sent 
to prison. 

Bazarian immediately filed for bankruptcy, claiming to owe $276,000, in- 


eluding $24,000 in unpaid Las Vegas hotel-casino bills. In June 1979 tJie bank- 
ruptcy trustee determined that Bazarian had no assets at all and he was forgiven 
his debts. Five years later he was chairman, CEO. and sole shareholder in CB 
Financial, a company purportedly worth $141 million. 

"Charlie is a very entrepreneurial person," said Sig Kohnen, who started 
CB Financial with Bazarian in 198?. "He has picked himself up by the boot- 
straps." Unfortunately they were attached to someone elses boots. 

CB Financial was Bazarian's baby. He told us the company borrowed money 
from thrifts and re-loaned it to investors in real estate partnerships, some of 
which were tax shelters. Bazarian formed some of these partnerships himself, 
and in those cases he was loaning to his own limited partners. He made part of 
his profit by charging his borrowers more for the money (in interest and fees) 
than the thrifts charged him for the money. But Bazarian got double duty out 
of his investors. He took the notes they signed when he made them loans and 
either .sold the notes at a discount or pledged them as security for more loans 
from thrifts and banks. 

Charlie had a veritable perpctuai-motion money machine going. The more 
loans he made to his investors, the more in\estors' notes he held that he could 
sell or pledge for more loans, an arrangement that appeared to us to closely 
resemble a Ponzi scheme. At its height CB Financial had a total debt approaching 
$200 million. Bazarian used some of the money to buy stock in savings and 
loans as one way to win the hearts and minds of lenders, according to his associate 
Sig Kohnen. In 1985 Bazarian owned $15 million of stock in at least nine 
institutions. Among the lenders he did business with were United Federal Savings 
and Loan and SlSCorp (the two companies Ferrante would soon sell loans to). 

When, in August 1985, Ferrante wanted to dispose of some of the $15 
million in Carson loans, Be\erly Hills loan broker .\1 '^'arbrow introduced Fer- 
rante to Bazarian. Again we saw what a critical role loan brokers like John 
Lapaglia (who arranged loans for Norm Jenson) and Al Yarbrow played in the 
thrift crisis. They found willing lenders for needy borrowers, and for the intro- 
duction the broker received a commission based on a percent (usualh' 2 to 5 
percent)"' of the loan. The shakier the borrower or deal, the higher the com- 
mission. Some loan brokers, looking for crazy lenders, traveled the country with 
their briefcases stuffed with crazy deals. 

Al Yarbrow was a particularly well-connected loan broker. ha\ing been in the 
business since the 1960s. He was a bright, articulate, distinguished-looking man in 
his fifties, over six feet tall. A conservati\e dresser, he projected the classic corporate 
U.S.A. image. Those who did business with him said he worked hard, was always 
well prepared, and gave the impression of being a real professional. 

Be that as it may, in tiic late 1960s Yarbrow was charged with diverting over 
$300,000 from his Bradley Mortgage Company's impound accounts. The money 
had been paid to Bradley Mortgage by homeowners who had arranged their 

Lazarus • 69 

FHA mortgages through Bradley, and it was supposed to be used to pay insurance 
and property taxes, histead, Varbrow had used the money to finance his other 
business ventures. Nearly 400 homeowners got a rude surprise when the tax 
man informed them that their property taxes were delinquent. We learned that 
Yarbrow repaid the money as part of an arrangement with the Los Angeles 
County prosecutor. 

When Yarbrow introduced Ferrante to Bazarian in 1985, Charlie sent Fer- 
rante over to United Federal Savings and SISCorp. United Federal Savings 
agreed to buy $3 million worth of Consolidated Savings' Carson loans and 
SISCorp agreed to purchase $5 million more. The ice thus broken, Ferrante 
and Bazarian found a number of ways to do business together. Along the way, 
regulators said, $3. 5 million disappeared. As FSLIC attorneys later described 
the deal in court. Consolidated had agreed to buy a package of loans from 
SISCorp and had sent $3. 5 million to Bazarian to forward to SISCorp. SISCorp 
said they never got the money. Consolidated didn't seem to care, regulators said, 
and did virtually nothing to recover the money. 

Even while he was wheeling and dealing with Ferrante, Bazarian was build- 
ing onto his house of cards. His CB Financial empire, fed on loans and enmeshed 
in complicated financial transactions, began to collapse when in 1986 federal 
tax changes sharply reduced the allure of the kind of tax shelters Bazarian was 
offering his investors. Bazarian was sued at least 16 times in Oklahoma courts 
in 1986 by people who claimed he owed them more than $77 million. " Bazarian 
claimed his problems were caused by federal thrift and bank regulators who 
sabotaged his growing empire. But in a moment of candor he also admitted to 
us, "I just borrowed tremendous amounts of money. ... I just had an appetite 
that was absolutely incredible for, you know, money." 

When regulators stopped thrifts from making loans to Bazarian's operation 
and began suing him for recovery of old loans, his wife literally broke into song. 
Janice Lee Bazarian fancied herself a singer, and in 1986 she recorded, with 
her group, "Janice and the Deadbeats," a song they called "FDIC" about the 
horrors of dealing with hard-hearted bank regulators. Sung to the tune of 
"YMCA," made popular by the Village People, the chorus went: 


It's time to pay to the F-D-I-C. 

They can have everything that you signed and agreed 

You can hang out in bankruptcy. 


It's time to pay to the F-D-I-C. 

You can get yourself clean, you can make an appeal 

Your bank is gone and these guys won't deal. 

(copyright 1987, u.sed with permission of Janice Lee Bazarian) 


By May 1987 more ofBazarian's schemes were catching up with him. Vernon 
Savings and Sunbelt Savings, hvo Dallas institutions, and Borg- Warner Accep- 
tance Corporation, an industrial lender in Chicago, tried to force Bazarian into 
bankruptcy, asserting claims of over $16 million. When Bazarian and CB Fi- 
nancial finally agreed to the involuntary bankruptcy in October, a long list of 
thrifts and banks lined up to sue for recovery.'- Among them was Consolidated 
Savings Bank (then in the hands of regulators), which said Bazarian had defrauded 
the thrift of $12.3 million." CB Financial was about $90 million in debt. 
Bazarian estimated his personal debts totaled about $108 million, which included 
Las Vegas gambling debts of $469,000. 

But Bazarian didn't let these problems affect his life-style. In the same year 
he and Janice Lee bought a new home in Oklahoma City. Bazarian didn't say 
what he paid for the house but two years earlier, in a hotter real estate market, 
it had been on the market for $2 million. From his new home Bazarian com- 
plained expansively to reporters that people were bringing him great deals but, 
because of all the charges swirling around him, he couldn't find a bank willing 
to lend him money. Friends said Bazarian was just misunderstood, that he was 
well-meaning but too trusting of others and too eager to make deals. Even an 
assistant LI.S. attorney admitted that Bazarian had charm: "He'sa very endearing, 
charming fellow. He has a way of becoming very likable. "''' 

Try to tell that to the process server hired by the FSLIC to ser\e a subpoena 
on Bazarian in relation to his deals with Consolidated. According to testimony 
during court proceedings the process server made numerous trips out to the 
Bazarian mansion with no results. Then when someone finally did come to the 
door, they were two thugs brandishing guns. The process server ran to his car 
and sped off, only to look in his rear\iew mirror and sec that the two men were 
following in their car. A half-hour, Hollywood-style car chase through the streets 
of Oklahoma City ensued. The process server was finally able to lose his pursuers, 
and he returned home to tell the FSLIC to find someone else to ser\e Bazarian. 
A FSLIC attorney told the story to a Los Angeles judge who quipped, "That's 
the way they do things in Oklahoma." 

Consolidated Sa\ings' Chairman Angotti claimed he had been misled about 
Bazarian and wished he'd never heard of him. "We had no information about 
his former criminal activities," Angotti claimed. "If we had, we wouldn't have 
done business with him." Angotti said he belie\ed there was a darker side to the 
Bazarian affair. "I was fooled and defrauded by more than Bazarian. I was 
defrauded by the Federal Home Loan Bank itself. When 1 contacted them to 
get a reading on SISCorp and Mr. Bazarian, those sons-a-bitches just told me 
that he [Bazarian] was okay. They let me walk right into that thing because you 
see I was a pain in the ass as far as they were concerned. The Federal Home 
Loan Bank boards of Topeka and San Francisco, they framed me. They ruined 
the good name of Ottavio A. Angotti."" 

Lazarus '71 

(In 1988 a baiiknipfcy court trustee alleged tiiat Bazarian had been secretly 
transferring assets to trusts for liis children and concealing them from the trustee. 
Later Bazarian reached a settlement with the trustee in which he agreed to 
relinquish his Oklahoma City mansion and many other assets to satisfy creditors. 
The trustee did agree, however, to let the Bazarians keep the copyright to Janice's 
song, "FDIC") 

By mid-1985, a little over a year after opening for business, Ferrante had 
made a big dent in Consolidated's bottom line. Finally federal regulators were 
eyeing him nervously. They conducted an examination of the S&L's books, 
which they claimed showed major inconsistencies between Consolidated's rec- 
ords and the facts: 

1. Consolidated said 84.8 percent of its loans were mortgage loans se- 
cured by real property; the truth, according to examiners, was that 
52.7 percent of its loans were unsecured commercial loans, a majority 
of which were in excess of loans-to-one-borrower limitations. 

2. Consolidated said it had no brokered deposits; the truth was that at 
the time 70 percent of its deposits were brokered and more were 
pouring in every day. 

3. Most of Consolidated's loans were to 15 borrowers, most of whom 
regulators reported had suspiciously close ties to Ferrante. 

4. The net worth Consolidated reported included substantial noncash 
assets of questionable value. 

5. Loans lacked adequate documentation and Consolidated had no writ- 
ten formal loan policy and procedures. 

Given the extent of Consolidated's alleged infractions, we wondered why 
regulators let the thrift continue to operate for a year after the examination. The 
answer, we learned, was that regulators had lengthy procedures to follow, and 
they had to proceed in an orderly manner. "" 7'he modus operandi in the banking 
world was not to panic. Panic was the 'T" word of banking. Instead, there were 
careful, measured steps to be followed, calmly, quietly, and secretly, of course, 
so the public wouldn't panic. 

Besides, Ferrante and Angotti weren't making it particularly easy, or com- 
fortable, for regulators to examine Consolidated's books. Immediately following 
the critical June 1985 examiner's report, the regulatory apparatus tried to lurch 
into action, issuing a series of directives, restrictions, and cease-and-desist orders 
designed to jawbone Consolidated Savings into compliance. As a result Chair- 


man Angotti, who was increasingly called upon to placate Consolidated's FHLB 
supervisory agent, particularly on the Carson deal, began harassing bank ex- 
aminers. Eventually things got downright personal and came to a head when 
Angotti allegedly threatened federal examiners "with grave bodily harm including 

Depending on whose version you believe, the threat was either sinister or 
semi-sinister. According to one FHLB examiner, Angotti threatened to kill him. 
Regulators contended similar threats were made to another auditor as well. A 
public relations firm hired by Ferrante following the 1986 federal takeover of 
Consolidated Savings Bank told us it was ail a big misunderstanding. 

"Mr. Angotti is Italian," PR woman Sherry Twamley explained in a soft 
voice. "After weeks of struggling with federal regulators, Mr. Angotti just got 
angry one day and, instead of swearing at them in English, did so in Italian. If 
you translated what he said literally, it meant 'I'm going to cut your balls off.' 
But really," she added, "he's just a 'Mr. Harmless Professor.' " 

Angotti agreed with Sherry 1 wamley's version of his threats, but he added 
that after his suffering at the hands of regulators he might have strengthened his 
threat. Angotti complained that they seemed obsessed with the "Mafia" and one 
federal examiner made constant allusions to Angotti's heritage and the mob. 
"He used to ask me all the time if I was taking my instructions from the Mafia, " 
Angotti said incredulously, adding in his Italian accent that if he had known 
then what regulators had in store for Consolidated, he would have "eaten their 

Angotti also speculated, "I think the state and feds had approved Robert for 
Consolidated but missed all the stuff about the bribery case and shooting and 
stuff. When they discovered it Consolidated had already been appro\ed and I 
think they were just trying to force him out because their investigation of him 
didn't turn any of this stuff up." 

Ferrante, in a counterclaim filed against the FSLIC, claimed that "Angotti, 
representing the new California-based S&Ls, arguing forcefully for the rights of 
an S&L to engage in all types of profitable commercial activities, including 
commercial lending," was anathema to FHLBB Chairman Ed Gray, who rep- 
resented the interests of "the club," or the long-established large thrift institutions. 
Ferrante claimed that Ed Gray, in Washington, and regulators at the San Fran- 
cisco FHLB conspired to "destroy Consolidated and Ferrante and Angotti, 
thereby removing them as political forces within the industry." He said the 
FSLIC colluded with newspapers and the media in a maniacal mission to destroy 

Whatever their reasons. Federal Home Loan Bank examiners ftom San 
Francisco continued to hound Angotti. They were cutting their way through 
the maze of partnerships, limited partnerships, trust assignments, and promissory 

Lazarus ■ 73 

notes Consolidated had erected around the Carson project. Ferrante later alleged 
in court documents that from November 1985 the thrift was hardly doing any 
banking at all. Instead, management and staff^ spent most of their time trying to 
satisfy regulators through two bank examinations, one agreement promising to 
correct any problems, eight meetings, and at least 41 long letters of instruction 
accompanied by hundreds of pages of documentation. 

In what Ferrante characterized as a thoroughly unreasonable action, regu- 
lator Polly Cortez advised the FHLBB in February 1986 not to approve Ferrante's 
application to own another savings and loan. Then in March federal examiners 
began what would turn out to be the final inspection of Consolidated Savings' 
books. They later reported that Angotti, pushed for answers to embarrassing 
questions, again resorted to threats. He called examiner Darrell De Castro into 
an office to complain about the examination. The more Angotti talked, the 
more frightening his rhetoric became. 

"If they want to fight, I can fight," Angotti vowed, according to De Castro. 
"And I don't lose. No one is going to close this bank. If they do, I will have to 
be dead. I mean that literally. And if they shoot me, I will have to shoot someone. 
And I hope it's not you." Unamused by Angotti's "Godfather" imitation, the 
FHLB asked for, and received from the court, a temporary restraining order 
barring Angotti or any other Consolidated official from interfering with exam- 
iners. Regulators returned with armed guards from the U.S. marshal's office, 
just for good measure. Left to do their job without distractions, regulators soon 
found the institution was insolvent. 

On May 22, 1986, at 4 p.m., agents of the FSLIC pushed through the doors 
of Consolidated's new offices in Irvine and took control of the thrift. They were 
accompanied by FBI agents, some carrying automatic rifles, and local police. 
By now they were very familiar with the story of the Ferrante shooting incident, 
his claims of Israeli Mafia involvement, and. Angotti's blunt threats to their 
examiners. FHLB attorney Bart Dzivi later testified they had also been warned 
by local law enforcement that there was an ongoing investigation into Ferrante's 
alleged links to organized crime.'" Under those circumstances the green-eye- 
shaded regulators weren't about to walk in armed only with calculators. 

Angotti was offended by his treatment that day. He said the FBI agents who 
accompanied the federal regulators held machine guns on him and the bank's 
tellers and also manhandled him personally. 

"They came into my office and threw me up against the wall and frisked 
me," said Angotti. But Angotti had not been exactly caught off guard by the 
raid. Five hours earlier a reporter acting on a tip had called him. 

"I hear they're going to shut you guys down today. Any comment?" the 
reporter had asked. 

There was stunned silence on the line, and then Angotti blurted, "Oh, shit! 


Thanks!" and hung up. (In 1986 and 1987 the reporter received a Christmas 
card from Angotti. In 1987 the card carried the simple message "Again, thank 
you. belated thanks. — Ottavio A. Angotti.")-' 

When the FSLIC team arrived at Consolidated's offices that afternoon, 
attorneys for regulators claim they found three large trash bags filled with shredded 
bank documents. Fifteen minutes after the takeover they found a bank official 
still frantically shredding. Regulators claimed later that other important docu- 
ments were smuggled out the back door to Consolidated's corporate office even 
as the thrift was being seized. 

While regulators secured Consolidated Sa\ ings' Irvine office. FBI agents and 
Bank Board officers simultaneously stormed the Newport Beach office that Fer- 
rante shared with his attorney, Eric Bronk. A Mexican standoff ensued, with 
Bronk maintaining that neither Consolidated Savings nor Ferrante had any 
records at his office. While Bronk stalled, several people left the building carrying 
briefcases. Eventually Bronk went into a back office and after a long wait, 
regulators said, he returned with a single Consolidated-related file. After further 
altercation he repeated the process and produced another file. This stalling action 
continued for a couple of hours, during which time Bronk produced about half 
a dozen Consolidated files. 

Finally examiners decided to call it a day and continue the next. It was late 
in the afternoon and everyone was tense and tired. Both sides were clearly 
standing their ground. But before they left the examiners had the locks changed 
on the doors, and they posted a Pinkerton guard outside for the evening. Then, 
just as everyone was filing out to their cars to leave, Ferrante suddenly appeared, 
walking out of a back office and, without saying a word, driving off. He had 
been there, apparently, the entire time, FSLIC's attorneys claimed. 

Things didn't get any better the next day. Bronk/Ferrante associates scurried 
around clicking flash pictures of arriving FSLIC clerks and examiners. They 
also took photos of their license plates and leajjed into the air to click pictures 
through the windows. Nervous FSLIC employees went to court and obtained 
another restraining order, in which they said they feared the photos were going 
to be used to track them down at their homes. 

Bronk loudly, and occasionally physically, protested the search of his offices, 
and finally a restraining order had to obtained by the FSLIC against any further 
interference from Ferrante or Bronk. Bronk filed an $8 million lawsuit claiming 
"unlawful search and seizure." It was easy to understand why Bronk was upset. 
In the nine months prior to the takeover, court records show. Consolidated had 
paid him $1.2 million for legal and consulting fees and personnel, travel, en- 
tertainment, and office expenses. 

When Superior Court Judge Richard Gadbois, Jr. , listened in court to FSLIC 
complaints of photographing, threats, and interference, he warned the attorneys 
representing Ferrante, Angotti, and Bronk, "If I get downwind of any serious 

Lazarus ■ 75 

suggestion of aiiytliiiig like this, I'll be all over that thing like a eheap suit, and 
I really mean heavy." And in the event any FSLIC employees were actually 
harmed in any way, the judge warned, "You think you've seen FBI agents. . . . 
Judge Web.ster" and I had a little talk and I'm dead serious about that." 

With the place to themselves, regulators quickly discovered just how bad 
things were at Consolidated. The total cost to the F'SLIC would exceed $100 
million, and regulators amassed enough evidence to file a civil suit against 
Ferrante, Angotti, Bazarian, and others for $52 million, the amount of money 
they estimated was missing. " Ferrante claimed he didn't have any of the contested 
millions and never had. The FSLIC spent hundreds of thousands of dollars on 
attorneys, seeking recovery from Ferrante and 19 other defendants. Some out- 
of-court settlements were reached, but such settlements fell within the Bank 
Board's veil of secrecy and were not made public. Sources told us pennies on 
the dollar were the norm. Meanwhile, Ferrante sued the FSLIC and the Bank 
Board, charging that they, not he, had ruined Consolidated. 

"These guys remind me of the kid who killed his parents and then complained 
that the system should be kinder to orphans," said one federal prosecutor about 
Ferrante and other thrift officials who complained loudly when their thrifts were 

The FSLIC notified Ferrante that the U.S. attorney's office and the FBI 
had opened an investigation in the wake of Consolidated's failure, but as of the 
day this book went to press, no criminal charges had been filed and the money 
was still listed among the "disappeared." As for the regulators' efforts to rescue 
Consolidated, well, it's one thing to hold out hope you can catch a horse once 
it's out of the stable, but it's quite another to know what to do when the horse 
has already been rendered into glue. Consolidated Savings Bank had been bled 
white and could not be saved, and on August 29, 1986, regulators closed Con- 
solidated Savings, claiming in their civil suit that Ferrante had used the thrift 
as "a slush fund for himself, members of his family, and various business as- 
sociates." The stock, all held by Ferrante, was rendered worthless and Consol- 
idated's wretched ruins were merged with a healthy thrift. 

In a desperate attempt to stop state-chartered thrifts from switching to federal 
charters after passage of Garn-St Germain, California had thrown its arms open 
to all comers. "If you think that federal hussy is easy, come on up and see me 
sometime, " the sign might as well have read on the door to the California savings 
and loan commission. Character, experience, and intentions of an applicant 
played little role in the commission's decision to grant an S&L charter. California 
officials were concerned primarily with starting the flow of contributions back 
to the politicians and assessments back into the state's regulatory apparatus. Larry 
Taggart, the state's new savings and loan commissioner, epitomized the laissez- 


faire mood of the time. He believed firmly in deregulation and apparently never 
met a thrift applicant he didn't like. 

Asked in 1989, during his testimony before the House Banking Committee, 
how it could be that he approved 235 thrift applications in just 400 days in 
office, Taggart responded that he had no way of knowing how a person would 
do as a banker until they had tried. "How many of the thrifts you approved later 
failed?" Taggart was asked. "Take your pick. Congressman," Taggart responded. 

As a result California, particularly Southern California, would lead the 
nation in aggregate losses at FSLlC-insured thrifts. To Consolidated Savings add 
Beverly Hills Savings, San Marino Savings, South Bay Savings, North American 
Savings, Ramona Savings, Westwood Savings, Butferfield Savings, Centennial 
Savings ... 42 institutions failed in California between 1980 and 1987. (The 
closest competition for "most failed thrifts" came from Illinois with 33, Texas 
with 32, Louisiana with 29, Florida with 21, Ohio with 19, and New York with 
18. ) And more was yet to come. When thrifts began to collapse in large numbers 
in the mid-1980s, federal and state officials tried to blame the failures on a 
depressed oil economy. But in California oil played a very minor role in the 
state's robust business climate, yet thrifts nevertheless failed.-'' The oil excuse, 
we suspected, was a slippery way of avoiding the real issue — fraud. 


Back in Washington 

The important role played by deposit brokers in the epidemiology of the disease 
spreading through the thrift industry was becoming clear to us. Someone had 
to make huge deposits into thrifts so high rollers would have money to wheel 
and deal with. Local depositors were not a good source of money. Their accounts 
were often small and their balances fluctuated and were undependable. Deposit 
brokers, on the other hand, were totally dependable. If a thrift executive needed 
$2 million or $20 million deposited at his institution Monday morning, deposit 
brokers got it there. All the thrift had to do was guarantee to pay the highest 
interest rate offered that day. If someone were going to take the risks associated 
with defrauding a thrift, they would want to make sure the thrift had enough 
money to make it worth their while. Deposit brokers could make that guarantee. 

By January 1984 Ed Gray, after eight months as chairman of the FHLBB 
in Washington, had become deeply worried about brokered deposits. He felt 
something needed to be done to limit them, and the solution he favored was to 
severely limit FSLIC insurance coverage of brokered deposits and thereby dis- 
courage their placement at thrifts. Gray called his friend Bill Isaac, then chairman 
of the FDIG, and asked him if he shared his concerns. Isaac told him the Penn 
Square Bank fiasco was all the proof anyone should need.' Together the two 
men mapped out a course of action that they knew would not be popular with 
either the indu.stry or the Reagan administration. They planned to implement 
joint regulations that would strictly limit insurance coverage on deposits acquired 
through deposit brokerage firms. 

As Gray saw it he was just doing his job — protecting the industry from a 
clear and present danger. After all, he reasoned, this wasn't the first time the 
FHLBB had limited brokered deposits. From 1963 to 1980 the Bank Board had 
forbidden a thrift to get more than 5 percent of its deposits from deposit brokers. 
The limit was enacted when thrifts on the West Coast used brokered deposits 



in the early 1960s to fuel rapid growth and to fund risky investments — the very 
characteristics that were worrying Gray now. The FHLBB had repealed the 5 
percent limit in 1980 when thrifts were having a hard time attracting deposits.- 

Gray and Isaac cemented their alliance against brokered deposits, however, 
and on January 1 5, 1984, the two men publicly proposed regulations that limited 
to $100,000 the amount of insured deposits any one money broker could place 
at a thrift or bank and still get federal deposit insurance coverage. Two months 
were set aside for public comment on the proposed rule and they soon had over 
165 replies (about a fourth of the replies were form letters issued by major 
investment houses in opposition to the regulation). Responses were running two 
to one against the proposal, but many small S&Ls favored the rule. They feared 
brokered deposits were threatening the safety and soundness of the banking 
system. Many said they had no difficulty raising enough deposits without resorting 
to deposit brokers. Steven A. Grell, president of First Bank in Pipestone, Min- 
nesota, said, "I have had many deposit brokers contact me concerning either 
buying or selling certificates. I find their business totally unjustified and haz- 
ardous to a federal insurance system." But most S&L officials objected to the 
regulation as penalizing all institutions for the abuses of the few. 

Gray said he also faced stiff opposition from Treasury Secretary Donald 
Regan. Regan was the administration's most adamant champion of deregulation, 
and Gray's stand on deposits quickly earned Gray the tag of the great "re- 
regulator" among thrift industry lobbyists. Gray was not turning out to be Regan's 
idea of a team player. Regan was chairman of the Depository Institutions De- 
regulation Gommittee (established by the 1980 Depository Institutions Dereg- 
ulation and Monetary Gontrol Act to phase out all interest rate controls). 
Before coming to serve in the Reagan administration, Regan had headed the 
New York brokerage firm of Merrill Lynch, which later would become one 
of the nation's largest deposit brokers. Many came to refer to Regan as the 
father of brokered funds.' Now Regan's healthy stallion was about to be gelded 
by Gray's proposed regulation. Gray said later, "It seemed like almost every 
week the DIDC [Depository Institutions Deregulation Committee] is having a 
meeting and taking more of the wraps off. The money brokers began multiplying 
like crazy, and the growth was going like crazy, but there was no capital to 
sustain it." 

According to Ed Gray, when Regan got wind of Gray's plan to rein in deposit 
brokers, he told Treasury Deputy Secretary R. T. McNamar that, Republican 
or not, old friend of the president's or not, "Gray has got to go." But Regan 
couldn't personally attack Gray. Regan's connections with Merrill Lynch were 
all too well known, as was the fact that brokered deposits were one of his favorite 
subjects. Instead, Regan put McNamar to work on the Gray problem. 

McNamar was the complete antithesis of Gray. He was a slick, buttoned- 
down dresser who wore pin-striped suits and looked more like an investment 

Back in Washington • 79 

banker than a government official. Gray, the son of a tractor salesman from 
i'exas, occasionally wore loud sports jackets and looked imcomfortable even in 
loose-fitting suits. 

McNamar picked up the phone and called Gray. They spent seven hours 
on the phone tliat day — during which Gray said McNamar tried every argument 
he could think up to c()n\ince Gray he should forget his brokcrcd-dcposit reg- 
ulation. For seven hours McNamar talked, and talked, and talked. And for seven 
hours Ed Gray, like an old farm mule, didn't budge. Gray believed McNamar 
was lobbying more for Don Regan than reflecting the administration's position. 
Regan did not respond to our requests for an interview, but Gray said he heard 
later that Don Regan was furious with him. The difference between the two 
men was a fundamental one: Gray wanted the S&L industry to specialize more 
closely in what they knew best, home lending; Regan wanted to make thrifts 
just like banks. As a deregulator, Regan talked a lot about level playing fields, 
where all businesses were created equal and only the strongest survived. But 
evidentK he didn't talk to Gray at all. Gray said Regan never once returned his 
calls during Gray's four years in Washington. 

A few nights later, on January 30, 1984, less than eight months after taking 
office, Ed Gray stayed late into the night typing away at a speech he would give 
the next day to lawyers attending a conference of the National Council of Savings 
Institutions (NCSI). The lawyers represented both banks and savings and loans. 
Gray, who had started out as a reporter for a small radio station in Fresno, 
California, always wrote his own speeches. He chain-smoked as he tapped away 
on his typewriter. He was no doubt smoking a cigarette when he wrote that 
brokered money was "like a spreading cancer on the federal deposit insurance 

The next day, with dark circles under his eyes from the night's work. Gray 
delivered his speech to the lawyers. Standing behind a podium at the Capital 
Hilton, he first took a deep breath. Then he prefaced his speech by saying, "I 
want to make it clear that as a champion of the free enterprise system myself, I 
am not against anybody making a fair profit." But by this time word had leaked 
that Gray had been unmoved by all attempts to change his mind on brokered 
deposits, and the audience knew the next word out of his mouth would be but. 
Before he even got to that point a couple of the lawyers sitting in the back of 
the room got up and left. Gray was "off the reservation, " a term Don Regan 
used to describe anyone in the administration who did not toe the party line. 

Gray was able to deliver his speech uninterrupted by any annoying applause. 
After all, most NCSI lawyers made a living representing thrift executives who 
took a free market approach to the S&L business. They didn't like being told 
by Gray that the brokered deposits fueling their enterprises — some of them from 
men like Mario Renda, who had brokered millions of deposits into Centennial 
and Consolidated — were bad medicine. (At the time over $34 billion in brokered 


deposits were at work at FSLIC-insured institutions. ) And they didn't like Gray's 
opinion that the money was being used for risky in\estnient schemes. Or that 
such easy money might encourage fraud. 

Industry leaders were dumbfounded at Gray's remarks. They had thought 
he was their guy. "These f)Cople wanted me in the job because they thought I 
was going to be their patsy," Gray would tell us later. He was supposed to be 
on their side. Now he was embarrassing them. There could be only one expla- 
nation and the word spread quickly — Ed Gray was a buffoon. Even some old- 
timers on the Bank Board staff thought he was "off the reservation. " They began 
to refer to him around the office as "Mr. Ed, " a reference to television's talking 
horse. And what was he talking about? The terrible condition of the FSLIC. 
His own staff went out on damage control, telling Washington reporters, "Ed 
doesn't understand that brokered deposits are not the problem." Some staffers 
said even worse — that he didn't understand finance and was unqualified for the 
job. One told us. "It's an outrage he was ever appointed." But to Ed Gray this 
was not a complicated matter. And he did, too, understand brokered deposits 
— all too well. 

But getting a handle on them would not be easy. There would have to be 
a fight, and the next salvo came directly from Merrill Lynch, which a week 
later released a report to the press that was critical of Gray's regulation. Edson 
Mitchell III, a young, fast-talking Merrill Lynch VP, told reporters he was going 
to follow Ed Gray around until the ban was overturned. 

If all this uproar cau,sed Gray to doubt for one moment the wisdom of his 
brokered-deposit regulation, those doubts didn't last. Within days of the Merrill 
Lynch news conference. Gray sat in the darkened board room at Bank Board 
headquarters, with Bank Board members Mary Grigsby and Don HoNde, and 
watched the videotape of the vacant, crumbling 1-30 condos built with loans 
from Empire Savings and Loan near Dallas. Grigsby, in her early fifties, was a 
Texan who'd worked in the S&L business most of her adult life. She couldn't 
believe her eyes. A hundred million dollars of Empire's money, just rotting away 
in the Texas sun. Empire had been a tiny $20 million thrift that grew almost 
overnight to $330 million, using brokered deposits. The Board voted immediately 
to fire Empire's chairman, Spencer Blain, and close Empire, the first closing 
that regulators admitted was caused by fraud in the thrift industry's 50-year 

When the videotape was over Gray watched it again. Over and over he 
watched it. Empire Savings was the embodiment of cvervthing he had feared 
might be wrong with the way thrifts used brokered deposits for risky, sometimes 
fraud-ridden, ventures. Gray showed the tape to his entire staff, including those 
doubting Thomases who had back-stabbed him to the press just days earlier. He 
told us he even called his friend Paul Volcker, head of the Federal Reserve 
Board, and Representative Fernand St Germain, House Banking Committee 

Back in Washington • 81 

chairman, to his office for a screening. He must have shown tiie tape thirty 

Now Gray was ready to take his message directly to the industry itself He 
chose the upcoming U.S. League's annual convention to make a speech on the 
evils of brokered deposits. Less than two years earlier delegates at this convention 
had gushed for Gray to be their next F'HLBB chairman. He knew only too well 
his reception this time would be far less pleasant, but so be it. Brokered deposits 
were destroying the industry, and the LI.S. League and its members had to wake 
up before the damage was irreparable. 

The night before Gray was to speak. Gray said U.S. League President Wil- 
liam O'Gonnell begged him to water down his brokered-deposit regulation. 
O'Connell, in his early sixties, a slight man with a tuft of silver hair around his 
ears, was a seasoned lobbyist who employed a mildly persuasive manner. His 
consistent refrain to Gray was that the S&L industry needed to buy time and it 
was Gray's job to help. The League thought that maybe the ban was "a little 
too tough," O'Connell told Gray. Although the League's members weren't crazy 
about their growing dependence on short-term brokered funds and would offi- 
cially support Gray's brokered-deposit regulation, O'Connell told Gray they did 
like the idea of being able to use long-term brokered funds (deposits of a year 
or more). Could Gray maybe amend the regulation to allow for long-term 
brokered deposits? But the next day Gray made his speech: brokered deposits 
were trouble, all of them, long and short. They were an accident waiting to 
happen. He announced that the ban was on and would continue unchanged. 
He hadn't budged. 

His intransigence infuriated many in the industry, especially deposit brokers 
and the thrift executives who were using the brokered deposits. They were tired 
of Ed Gray. He was becoming a broken record on the subject of brokered deposits. 
To make matters worse, he had begun to rattle on in public, airing even more 
of the industry's dirty laundry, telling people that the FSLIC might run out of 
money if thrifts kept failing and that thrifts would have to pay higher FSLIG 
insurance premiums. O'Connell and other industry leaders also became uneasy. 
Gray was talking too much. Much too much. He was making people nervous. 

Members of the Reagan administration started to wonder just how this loose 
cannon had gotten on deck. And the answer, some felt, was revealed a few weeks 
later during hearings to confirm Ed Meese as the nation's new attorney general. 
Testimony quickly focused on Meese 's friends and favors, particularly sweetheart 
loans Meese had received from Ed Gray's old thrift. Great American Eirst Savings 
Bank of San Diego. In the late 1970s Great American had loaned $120,000 on 
Meese's home in California. Then when Meese moved to Washington to be 
the White House counselor upon Ronald Reagan's assumption of the presidency 
in 1981, Meese bought a home in Virginia with the help of a $132,000 Great 
American loan on his California home. Combined payments on both homes 


(totaling $51,000 a year) were more than Meese could handle on his $69,800- 
a-year salary, and for 1 5 months he made no payments to Great American on 
the California home. Nevertheless, Great American did not foreclose. In fact, 
the thrift loaned Meese another $21,000 as a fourth trust deed on the house, 
for a total of $273,000 in loans on the Galifornia house. A Great American 
spokesman said the home had been appraised for $335,000. However, that 
appraisal was never borne out by the marketplace. The house finally sold in 
1982 for $307,500. 

Nearly everyone involved in the Meese home loans got a job with the 
administration. Gordon Luce, Great American Savings president, was appointed 
a delegate to the United Nations. In May 1983 Ed Gray landed the job of Federal 
Home Loan Bank Board chairman. Thomas Barrack, a wealthy Southern Cal- 
ifornia developer, helped to locate a buyer for Meese's California house and was 
later appointed to a high post at the Interior Department. John McKean, who 
arranged two Meese loans totaling $60,000, was appointed to the U.S. Postal 
Service Board of Governors. Meese said none of these appointments had anything 
to do with the favors Great American Savings had done for him on his house. 

However close Gray might have been to the top men in the Reagan White 
House, his role in the flap over brokered deposits had turned one of the most 
powerful men in the administration, Donald Regan, into an enemy. The Wash- 
ington meat grinder went to work on Gray. Stories about Gray's lack of intel- 
ligence circulated from office to office like bad jokes. 

The fact that Gray was an absentminded professor only added fuel to the 
rumor mill. White House Spokesman Larry Speakes had two favorite Ed Gray 
stories. In one he told about Gray's bad habit of losing cars. Gray would sign a 
car out of the motor pool, drive it to the airport, and then forget about it. When 
he returned from his trip he'd call a cab. Suddenly the motor pool noticed they 
had a half dozen cars missing, and a check of the airport parking lot turned 
them up right where Ed had left them. 

In another case, so the story went. Gray was visiting the California legislature 
with a lot on his mind, as usual, and as he left he failed to notice a handwritten 
note on the elevator door: "Do Not Go to the Basement." Oblivious, Gray got 
on the elevator and pushed the button for the basement . . . which was flooded. 
Those waiting for the elevator above could hear Gray yelling for help as the 
elevator doors opened and the water rushed in on him. 

And the tales went on and on. Gray heard about the stories, the Mr. Ed 
jokes, Don Regan's complaints to the president that Gray was not qualified for 
the job, and worse. But Gray was sure he was right. Everywhere he looked, it 
seemed, he saw brokered deposits fueling furious growth at once-modest little 
thrifts. The more deposits poured into an institution, the nuttier became the 

Back in Washington • 83 

deals that the thrift's executives sanctioned. Champions of brokered deposits 
contended that Gray was simply watching the free market at work, efficiently 
transferring money to areas where it was needed. Brokered deposits weren't 
fueling fraud, they argued, they were fueling enterprise, innovation, growth. 
Now was not the time, they said, to get cold feet on the road to a deregulated 

Gray was not convinced. "I believe in Reaganomics," he said, "but this isn't 
what I had in mind." 


Tap-dancing to Riches 

Deregulation of the interest rate that thrifts could pay to attract deposits in 1980, 
combined with the increase in insurance co\erage to $100,000 per account and 
the removal by the Bank Board of any limits on brokered deposits, certainly 
revitalized the deposit brokerage business. Between June 1981 and June 1982 
brokered deposits at savings and loans increased fivefold,' and in the next four 
months they went from $15.6 billion to $26 billion. Among the businessmen 
profoundly affected by the new deregulation was Mario Renda, who in 1980 
became a deposit broker. Until that time he had been a man searching for a 
way to get rich. Through the years he was always where the money was, as, for 
example, in the mid-1970s during OPEC's- heyday, when Renda had made 
several trips to Saudi Arabia to insert himself into the orbit of the world's most 
notorious deal-maker, Adnan Khashoggi. 

One day in 1977 Mario Renda, then ^6, walked through the gates in a 
concrete wall on a narrow street in barren downtown Riyadh, Saudi Arabia. He 
crossed a small desert yard to a low stucco bungalow where a Sudanese servant 
silently motioned him to enter. He stepped into a living room that resembled a 
Holiday Inn converted into an oriental suk (bazaar). Dozens of men in Western 
business suits or flowing caftans and kaffiyehs milled around the smoky room 
or sat at the several tables littered with ashtrays and ashes. Obediently, Renda 
found a seat and settled in for a long wait. 

A native New Yorker, Renda had arri\ed in Riyadh with a plan in his pocket 
to build precast concrete homes in Jidda, Saudi Arabia. He was a partner in 
IPAD (International Planners and Developers) Construction Consortium and 
wanted to build an empire on OPEC's purse strings. At that time Khashoggi 
was at the apex of his power.' The world's businessmen were rushing to his 


Tap-dancing to Riches ■ 85 

home in Riyadh, a jumble of added-oii bungalows where Khashoggi held court 
24 hours a day when he was in town"' and made multimillion-dollar commitments 
the way a teller makes change. A nod from Khashoggi could set a man up for 

Rcnda sat among that international gathering, described later that year in 
Fortune magazine, and waited his turn to make his pitch. Patiently he worked 
his way through the labyrinth and into Khashoggi's realm. When it came Renda's 
turn for an audience, he and Kiiashoggi reportedly closed a $5 million joint 
venture to build the concrete homes in Jidda. Renda went home a happy man, 
fancying himself an international financier. 

The deal later fell apart, as did so many of Renda's highfalutin plans, but 
the collapse did not derail Renda's determined march toward a Khashoggi life- 
style. He didn't want to run a construction company. He wanted to be a mid- 
dleman, a broker like Khashoggi who claimed to have made $575 million in 
the past six years by simply doing deals. Renda coveted expensive possessions, 
ostentatious displays of wealth, and life on easy street. 

"He wanted somewhere where he could park his Rolls-Royce, tell a few 
jokes, make a few phone calls, and go home and say he had a hard day at the 
office, " Renda's IPAD partner Sy Miller said later. "He just came here to make 
phone calls. " In the winter Renda reportedly kept a chauffeur-driven limousine 
running all day in front of the office to keep the car warm. He told Miller he 
wished he could put a big sign on one of his Rolls-Royces announcing the car 
cost $120,000 and then drive around New York City. "He said he wanted the 
world to know what it takes to own one of these and that he had it," said Miller. 

In 1980 Renda would become the ultimate "middleman" when he created 
First United Fund and became a deposit broker. Being a deposit broker would 
be his ticket to that good life. It would also earn him the reputation as the 
Typhoid Mary of the savings and loan business. 

Raised in the Queens section of New York, Renda had always had an 
entrepreneurial bent. He dropped out of Queens College, where he was majoring 
in music, to open his own tap-dance school on Long Island. By 1963 he owned 
and operated a music summer camp in the Berkshire Mountains in the northwest 
corner of Massachusetts. It seemed an idyllic life, but it was the slow lane as 
far as Renda was concerned. Bright, complex, charming, and lazy, Renda wanted 
more out of life. Suddenly, in 1975, he announced he was closing his camp 
and moving on to bigger and much better things. He told the owner of the camp 
next door that he had discovered a way to make real money. Within six months 
Renda went from tap-dance teacher to international financier. In 1976 he became 
partners with Sy Miller at InternaHonal Planners and Developers (IPAD), a 
Panamanian-chartered company that Renda said provided "international fi- 


nancing on major private and governmental construction projects throughout 
the world." 

He was a sweetheart of a guy. " Miller said. Renda would have the office 
staff "rolling on the floor laughing" at his stories. He seemed to be Mr. Whole- 
some, vcr\- straight, never told dirty jokes. He was a director on the executive 
committee of the Boy Scouts of America. But he wasn't much of a businessman. 

In 1977 he closed the deal for IPAD with Khashoggi at Riyadh. Miller wasn't 
impressed. "Khashoggi was a big bullshit broker. He v\as a S3 bill." Later. Miller 
commented, "They ate a lot of rice and lamb, but Khashoggi, like Renda. sold 
blue skies." The deal never materialized, nor did any of the other big-shot deals 
Renda supposedly negotiated on his overseas trips for IP.^D. Renda loved to 
hobnob with the rich and famous and that's apparently what he did on IPAD's 
expense account. Miller later said. "I would be a wealthy man today if we had 
nailed down some of the things we had going at the time. " Instead, in Julv 
1977, soon after Renda's trip to Riyadh, Renda left IPAD. 

But IPAD had not been a total loss for Renda. He had made valuable contacts 
in the Arab world while tra\cling in Khashoggi's circles. Khashoggi also repre- 
sented for Renda the kind of life he wanted for himself. He wanted to be a big 
shot, at the center of all the action, making deals with the wave of the hand, 
making or breaking the lives of others. Khashoggi, Fortune magazine reported 
in 1977, viewed himself as a J. P. Morgan or John D. Rockefeller. That probably 
sounded all right to Renda too. 

After leaving IPAD, Renda spent a short time as a treasurer of an Arab bank 
(Arab International Bank), an offshore banking operation used to handle millions 
in Arab petro-dollars. At Arab Internationa! Bank he first learned the possibilities 
inherent in certificates of deposit (CDs) — information that would soon come in 
very handy. 

Renda didn't stay long at Arab International Bank. In 1978, eager to strike 
out on his own, he formed Arabras, Inc., a one-man firm in New York City. 
The name of the new firm suggested Renda planned to continue to capitalize 
on his association with cash-rich Arab friends. The company's SEC filing said 
it would be doing business in the twin worlds of international finance and trade. 
But in 1980, when the U.S. Congress deregulated interest rates on savings 
deposits. Renda saw possibilities that transcended even the wealth of the Arabian 
oil sheiks. The new legislation was a boon to investors, who could then get a 
high return that was risk free (because the deposits were insured by the FSLIC). 
No doubt remembering what he had learned at .Arab International Bank, where 
the bank's deposit brokers moved petro-dollar CDs around the world in search 
of the best daily interest rates, Renda grasped the full implications of interest 
rate deregulation. He quickly changed Arabras. Inc.. to First I'nitcd Fund and 
became a deposit broker. Before his arrest in 1987 he would broker $6 billion 
(buy $6 billion in CDs) for 6,500 investors into 3,500 financial institutions. 

Tap-dancing to Riches ■ 87 

Rcnda started First United Fund in Januarv' 1980 with only $146,000 and 
two employees. (Forty-eight months later it would boast assets of $227 million, 
a brokerage business of $5 billion, an annual income of $5 million, and 100 
employees.) To get First United Fund off the ground, he needed a steady flow 
of deposit money, lots of it. Renda's break came one day when he went to a 
local computer store to look for a computer for his new office. He later testified 
that while he waited for the salesman, another customer, Martin Schwimmer, 
struck up a conversation. Renda soon learned that Schwimmer managed pension 
funds for two New York unions. Local 810 of the International Brotherhood of 
Teamsters, Chauffeurs, Warehousemen and Helpers of America and Local 38 
of the Shcetmetal Workers International Association. The two men retired to a 
nearby McDonald's for coffee, and that was the start of a beautiful friendship. 
Before Ronald McDonald could pour them a second cup, the deal was struck. 
Renda hired his very new friend, Schwimmer, to be financial advisor to his First 
United Fund, promising him $50,000 a year according to Schwimmer. (Later 
Schwimmer would report he made $400,000 in his first year with First United 
Fund and at least $1 million a year for the next three years.) Thereafter the 
advice Schwimmer gave to the union pension-fund bosses was to let First United 
Fund invest their money in certificates of deposit. In the following months 
Renda's network of banks and thrifts grew as he aggressively placed deposits for 
his new "clients." 

Teamsters Local 810 had 7,000 members, who were employed as wireworkers 
and factory workers in Manhattan. Federal authorities later charged that its bosses 
agreed to throw their brokerage business Renda's way in return for kickbacks. 
The Sheetmetal Workers Local 38 had 650 members, employed as sheet-metal 
workers in New York and Connecticut. Their bosses didn't even know Schwim- 
mer was putting the local's money at First United Fund. All they knew was that 
they had a financial advisor and he was investing their money somewhere. 
Between December 1981 and December 1984 the two locals invested about $100 
million through First United Fund. 

Renda had found a nice niche in the newly deregulated world of federally 
insured certificates of deposit. Using other people's money, he could get a percent 
of the action just by opening what amounted to savings accounts for them and 
collecting his commission from savings and loan officers, who were grateful for 
the deposits. Why would anyone work for a living when he could be a broker? 
But Renda and Schwimmer had an idea for a way to make an even larger profit 
from this arrangement. They told the 16 savings and loans and two banks that 
received this pension money to deposit their fees ($16 million over three years) 
in bank accounts that Renda and Schwimmer then kept secret from the IRS. 
(Though they didn't have to share with the IRS, Renda later admitted that he 
and Schwimmer did kick back a portion of their take to Teamster officials.) 

With millions of dollars at his disposal, Renda began to act like a sheik. 


Built like a fireplug, he had a platform installed in his office to elevate his desk 
so guests had to look up at him: "Power Desking." His office was described by 
one source as "a monument to bad taste, " garish and ostentatious, with red 
velour wallpaper. He moved his family into a ?0-room Garden City mansion 
surrounded by a couple of acres and a wall to guarantee privacy, and about this 
time he embraced yet another scheme for milking his brokerage business. His 
new idea involved a cast of "subcontractors" in Kansas City and Hawaii, and to 
understand the heist we first had to get to know them. 

In Kansas Cit)', back in 1980, little Indian Springs State Bank had been 
struggling to break out of its small shopping-center location, squeezed between 
Wig City and Athlete's Foot shoe store. The board of directors of Indian Springs 
was unhappy with the bank's lackluster performance, so they hired William 
Everett Lemaster, 56, away from a rural bank in Lexington, Missouri, because 
he had "impeccable credentials," a former chairman of Indian Springs bank told 
an American Banker reporter. One of Lemaster's first moves was to hire former 
local attorney Anthony Russo (whose credentials were anything but impeccable), 
who reportedly told Lemaster he could drum up all kinds of new business for 
the bank. 

The two men were very different: Lemaster was tall, thin, and distinguished 
and reminded associates of an ambassador; Russo was ten years younger, short, 
fat, and talkative, and he wore an ostentatious display of jewelry. Russo was 
plugged into centers of power in Kansas Cit)' from his years as a prominent 
criminal attorney there, and Lemaster may have wanted to use those contacts 
to invigorate Indian Springs bank. The kind of contacts had, however, 
were not necessarily the best medicine for a small financial institution. According 
to an official of the Kansas City Crime Commission, Russo had defended or- 
ganized crime figures in Kansas Cit>', in particular the Nick Civella crime family. 
Russo himself had served 16 months in Fort Leavenworth federal penitentiar>' 
in 1976-77 for bribery and interstate promotion of prostitution and had vol- 
untarily relinquished his license to practice law rather than chance disbarment. 
Nevertheless, Lemaster hired him in 1981 to be vice president of Indian Springs 

Bank records showed that Lemaster's plan to make Russo a bank officer was 
met with dismay by bank regulators in Kansas City, who knew about Russo's 
reputation and his 16 months in prison. The Kansas City regulators passed the 
application along to Washington with a strong recommendation to deny ap- 
proval. The warning was ignored by Washington and on August 19, 1981, the 
FDIC's board of review authorized Russo to be an Indian Springs officer but 
restricted his activities to "new business development." Russo's job at Indian 
Springs was to locate new depositors from among his wide-ranging business and 

Tap-dancing to Riches ■ 89 

personal contacts, and he had plent>' to offer in that capacity. A former Indian 
Springs board member later told a reporter that Russo was well suited to his new 

"He could walk up to someone and say that they were to move their account 
to Indian Springs State Bank, and people would do it with no questions asked." 

At about the same time that he hired Russo, Lemaster also appointed Iranian- 
American businessman Farhad Azima, 39, to be a bank director. The three 
men had reportedly met when Lemaster was an "advisory director" and Russo 
was a "financial consultant" for a mysterious airline. Global International Air- 
ways, owned by Azima and headquartered in Kansas City. In 1978 Azima had 
founded Global International Airways to ship cattle to Iran, he told a Kansas 
City Star reporter, but when the Shah of Iran was ousted in 1979, Azima had f. 
to adjust his business plan. With money borrowed from an Arabian international _ 
bank. Global International quickly became one of the nation's largest charter 
airlines, with 900 employees worldwide and 20 planes, including seventeen 707s, 
two 727s, and one 747, the Star reported. But to this day it is not exactly clear 
what Global International really did, and Azima refused our requests for an 

Global International Airways first came to the public's attention in 1979 
when it had an airplane stranded for three days on an airfield in Tunis, Algeria. 
The pilot had been paid $93,000 in advance to make the flight, but when his 
payment arrived in $100 bills in a suitcase, he became suspicious. And when 
cargo was loaded on his plane at the Tunisian airport, he demanded to see the 
relief supplies he was supposed to be flying from Lebanon to Nicaraguan refugees 
in Costa Rica. 

Let me see the "lettuce," he insisted. 

The "lettuce" turned out to be twin-barreled 57-millimeter guns with several 
dozen cases of ammunition labeled in Chinese. Later the Tunisian government 
said the Palestine Liberation Organization had been trying to send arms to the 
Sandinistas. A Global crewman later told the Star of a standing joke among the 

"They [airport personnel] would ask us what our cargo was and we'd tell 
them cabbages and cabbage launchers." 

Apparently to discourage nosy airport personnel, former pilots said subse- 
quent shipments stopped masquerading as cabbages. The munitions boxes "had 
Red Cross stickers all over the sides," one of Global's former pilots said. 

Global International developed a reputation among insiders as one of the 
CIA's secret charter airlines. Former Air America pilots^ showed up on its pilot 
roster. It flew arms shipments to Ecuador, Peru, Nairobi, Thailand, Haiti, and 
Pakistan. Azima later said the flights had been cleared by the U.S. State De- 
partment. Asked about the CIA, Azima told the Star, "No comment. "*" 

When Lemaster appointed Russo and Azima to posihons at Indian Springs 



bank in 1981, Global International Airways was at the height of its activities out 
of the Kansas City airport. Whether Azima got Indian Springs State Bank directly 
involved in covert activity, we could never determine. However, the following 
year Russo received a $25,000 check from Global Airlines, and later when he 
was questioned about the check in court (Russo was on trial for tax fraud. He 
was acquitted), he gave the following explanation: 

[Global International] was hired by the United States government to fly the 
president of Liberia, which was a new government, and its cabinet around 
the world on a goodwill tour. Liberia is a little country' in Africa that 1 
studied about, as a result, and learned a little bit about. After the War against 
[sic] the States, Lincoln, our president, sent some slaves to Liberia to live. 
And they lived on the, I believe, the west coast of Africa. Yes, the west coast 
of Africa. And formed this little country called Liberia. 

The United States has supported that countr>' over the years. And about in 
1981 they had a coup. Sergeant (Samuel] Doe, who was a sergeant in the 
Liberian Army, overthrew the government. The government was backed by 
the, our CIA and our government. And when the revolution or coup oc- 
curred, the United States then wanted to become friendly with the new 
government, wanted to continue to have ties between the United States and 
Liberia [not Libya, Liberia] and wanted us to continue our relationship with 
them. So they hired Karhad's airline. Global, to take Sergeant Doe, his 
entire cabinet, around the world on a goodwill tour. 

Farhad asked me if I would go as the "host" to the president and the cabinet, 
to escort them from countr)' to country. It was at that time that, of course, 
I was an officer of the bank and I had to check with Mr. Lemaster, who 
was the president, and he covered for me and I took that trip around the 
world and we went all around the world with the president and his cabinet, 
and the president and I became friends and I would introduce them and 
kind of act like an ambassador. . . . The arrangement with Mr. Lemaster 
at the time was that any fee I would recover I would split with him because 
he covered for me at the bank. 

Azima also testified during Russo's tax fraud trial, and the scheduling of his 
appearance had to be moved up one day because, he told the court, he had a 
luncheon meeting in Washington, D.C., the next day. A fru.strated member of 
the prosecution team later told us that she believed Russo was acquitted of the 
tax fraud charges partly because of the aura of respectability the references to 
the CIA gave him. 

Indian Springs State Bank treated Azima well. Examining bank records, we 
discovered his personal account at the bank was frequently overdrawn even as 
bank examiners demanded — on at least three occasions — that his loans be paid 
down. Each time examiners returned thev found the loans still on the books 

Tap-dancing to Riches '91 

and still in arrears. In 1983 Azima owed Indian Springs State Bank $800,000. 
At least $600,000 of the money went to Global International and a related 
company, even though Indian Springs State Bank's loans-to-one-borrower limit 
then was $348,881. Collateral for one of Azima's loans was his DeLorean.^ 

Azima also had other connections at Indian Springs State Bank. President 
Lemaster claimed in bank examination reports that Azima had sponsored the 
Dunes Hotel and Casino in Las Vegas for an unsecured loan of about $200,000 
in 1982. The loan was guaranteed by Dunes owner Morris Shenker. Shenker 
was a millionaire St. Louis defense attorney who in the early 1980s was chairman 
and controlling stockholder of the Dunes Hotel and Casino in Las Vegas.' 
Shenker had been Teamster boss Jinmiy Hoffa's attorney and confidant for over 
ten years, until Hoffa disappeared in 1975. Through him Shenker had access 
to the Teamster Union's $1.5 billion Central States, Southeast, and Southwest 
Areas pension fund.'^ Bank records revealed that a Shenker business associate 
from Las Vegas, Jay P'ihn, also had a loan at Indian Springs. Russo testified he 
and P'ihn teamed up to broker fuel to Azima's Global Airways, which, according 
to Russo, had a contract with some Las Vegas hotel-casinos to fly junkets (ferrying 
tourists to Las Vegas). Kansas bank regulators complained about the Dunes 
Casino loan, saying Shenker was not a creditworthy borrower and the casino 
was too far away from Kansas City. Regardless of demands by regulators that 
the loan be removed from the bank's books, it never was.'" 

Federal organized crime investigators said Shenker was an associate of the 
Nick Civella mob family in Kansas City." Regulators found the Civella family 
at Indian Springs bank too. They were part of that "new business" they said 
Tony Russo brought to the bank. Members of the Civella family got $400,000 
in loans from Indian Springs, bank records show, including one for an Italian 
restaurant. Their accounts were "habitually overdrawn," a bank examiner com- 
plained in one examination report. At the end of 1982 regulators alleged that 
bank officers kept a loan to a Civella current by rolling it over (renewing it) and 
increasing the amount of the loan at each renewal to cover the interest costs the 
loan had accrued since the last renewal. 

At the same time that Indian Springs was making sweetheart loans to the 
Civella family, some of the Civellas were embroiled in a messy criminal pros- 
ecution in Kansas City. Federal organized crime prosecutors in 1981 had indicted 
brothers Nick and Carl Civella and others for skimming $280,000 off the gaming 
tables of the Tropicana Casino in Las Vegas. Nick Civella died of cancer before 
the trial ended in July 1983, but his brother Carl was convicted. Carl Caruso, 
convicted along with the Civellas, was also on the loan list at Indian Springs. 
Caruso operated junkets for the Las Vegas Dunes out of several Midwestern 
towns, including Kansas City. In court it was revealed that he was the bagman 
for the skimming operation, transporting the skim from the casino to Chicago 
and Kansas City for distribution to the mob families there. 

92 • INSIDE |OB 

In this setting Mario Rcnda was about to embark upon a new scam. He had 
recently met Franklin Winkler, the son of an old friend, and they had agreed 
to go into business together. 

Franklin Winkler was an international wheeler-dealer. He and his dad. V. 
Leslie Winkler, were cosmopolitan con men. They were Hungarian Gypsies, 
smooth ojjerators, and both spoke a number of languages. Franklin, who was 
in his forties, had been born in Istanbul and had li\ed all o\er the world, wherever 
his father Leslie's schemes took them. Franklin had most recently li\ed in Cuba, 
Italy, Australia, Kansas City, and Southern California and had lately settled 
temjx)rarily in Hawaii. Leslie lived in Palm Springs. Franklin and his father 
were fat and affable. Franklin weighed over 300 pounds, but he was a charmer 
whom women found enchanting. Described by federal prosecutors as "a criminal 
financial genius," Franklin had reportedly already been convicted of felony frauds 
in both Italy and France but had never spent a day in jail. An attorney who had 
cross-examined him said he had a remarkable facility for slipping into a variety 
of nearly perfect foreign accents. 

"He'd be talking to me about something during court recesses and all of a 
sudden he'd be speaking with a perfect French accent, or Italian, or Middle- 
European accent. He'd just throw it in for effect. The guy was really smooth." 

Franklin Winkler had been losing money on real estate investments in 
Hawaii, and regulators said he agreed to cooperate with Renda in a scheme that 
would benefit them both. Renda would broker deposits into savings and loans 
or banks if the institutions agreed to make loans to Hawaiian real estate part- 
nerships fronting for Winkler and Renda. "Linked financing, " where deposits 
were promised to a bank or thrift in return for loans, was not always illegal but 
regulators didn't like the practice because they feared the promise of huge deposits 
would induce financial institutions to make risky loans that they would not 
otherwise have made. But the linked financing Renda had in mind was illegal 
because it was an end run around Indian Springs State Bank's loans-to-one- 
borrower limits, which at the time were between $250,000 to $350,000.'- 

The timing of this new friendship bchveen Renda and Winkler was perfect 
because within weeks Anthony Russo went to Hawaii on vacation. Before he 
left he contacted an old friend who told Russo to look up a Franklin Winkler 
in Hawaii, which Russo did. The two men liked each other, and Winkler made 
Russo a business proposal. Authorities said Winkler suggested that under "the 
right circumstances" he and his friend Mario Renda could get Indian Springs 
bank all the deposits and all the loan business it could handle. Russo liked the 
sound of the offer. 

A few months later, early in 1982, Russo traveled to Las Vegas, where he 
met again with Franklin Winkler. Accompanying Winkler this time was Sam 

Tap-dancing to Riches ■ 93 

Daily, a retired Air Force colonel, then a Honolulu realtor. Daily was a Louisiana 
redneck, a short, fat man who looked like a IV huckster. He had hlack, greasy, 
plastered-down hair, a sailor's tongue, and a terrihle temper. 

Indian Springs State Bank Vice President Anthony Riisso, con man and 
swindler Franklin Winkler, and Hawaii realtor Sam Daily met in a suite provided 
as a favor to Russo by Dunes owner Morris Shenker. Regulators charged that 
under the plan the men formulated at the Dunes, Renda would broker deposits 
into Indian Springs State Bank — "courtesy deposits" they were euphemistically 
termed. In return the bank would make loans to straw borrowers" who would 
be fronting for Renda, Winkler, and Daily. 

I'he details of the plan would work like this: Renda would put the word out 
through First United Fund that he could place deposit money with banks and 
thrifts at rates a full percentage point or more above the going rate at the time. '"' 
Renda knew full well that the prospect of such a high interest rate would attract 
managers of credit unions and pension funds who were constantly on the prowl 
for the best rate for the money they managed. (Renda and his brokers mockingly 
referred to these credit managers as "rate junkies.") 

All a bank or thrift had to do to get these deposits was agree to make a few 
loans to Renda's Hawaii "investors." Once the institution agreed to make the 
loans, Renda would send the deposits to the thrift or bank and, almost the same 
day, Winkler and Daily would send in their straw borrowers" to get the agreed- 
upon loans. "' These individual borrowers (lined up by Winkler and Daily) would 
get a fee of between 2. 5 percent and 6 percent of the loans obtained in their 
names. '^ When the loans were funded the borrowers would turn the money 
over to Winkler and Daily, who would tell the straw borrowers they could just 
forget about having to pay back the loan. Winkler and Daily would take care of 
that, they said. By sending in many straw borrowers, Winkler, Daily, and Renda 
disguised the fact that all the loan money was going to them. And when the 
loans went into default, the straw borrowers' names would be on the foreclosure 
papers and lawsuits, not their names. 

The key to the whole arrangement was Renda's deposits. They were the bait 
that enticed bank officials to play along with the scheme. Without them little 
of the looting over the next five years would have been possible. 

Russo later testified that he introduced Franklin Winkler to Indian Springs 
State Bank President Bill Lemaster. Winkler told Lemaster that First United 
Fund would broker into Indian Springs all the deposits he wanted in return for 
nothing more than some loans. To Lemaster this must have looked like a good 
way to pick up both deposits and loan business in one neat package, without 
having to pay the deposit broker a commission, and he agreed to the arrangement. 
In June 1982 Winkler, Daily, and Renda began shopping for straw borrowers. 


By July 19. 1982, First United Fund had placed the first batch of brokered funds 
at Indian Springs State Bank, and the first crew of straw borrowers were in the 
starting gate. Winkler outlined the operation in one last letter to Renda that 

"1 suggest that we proceed with this first pilot transaction and then we should 
get together in order to formalize a proper modus procedendi for all future 
transactions of this type." In other words, if the scam worked at Indian Springs 
State Bank, they would expand their operation to other financial institutions. 

Indian Springs State Bank made the loans to the straw borrowers as planned. 
The scheme worked perfectly. And on August 29 Franklin Winkler called a 
meeting with his dad, Leslie, and Renda at Southern California's luxurious La 
Costa resort to review the progress of their plan.'* After the La Costa sit-down, 
Franklin's father, Leslie Winkler, sent Renda and Franklin a memo grandly 
entitled "Memorandum Premenoira." In the memo Leslie stated: 

. . . Both Franklin and Mario have agreed to carry out a number of trial 
transactions under the contemplated terms and procedures. One transaction 
has already been concluded via k'.C. Bank'" and the intention is to rejjeat 
a few similar deposits which will demonstrate the feasibility of the operation 
of the program. (Leslie's interest in the project was not platonic. Because 
he had introduced Franklin and Renda, he was entitled to a "finder's" fee 
on each deal that went down.) 

In the month following the meeting at La Costa, the three men formed at 
least eight companies and partnerships to conceal the paper trail left behind by 
their activities. Renda, Franklin Winkler, and Daily began visiting banks and 
savings and loans in areas they had targeted for high-growth potential — Kansas 
City, Southern California, Honolulu, Texas, Denver, Phoenix, Seattle, New 
York, and New Jersey — and pitched their linked financing schemes. The code 
name used for these transactions at First United was, appropriately, special deals. 

Then Renda added a new wrinkle. He ran ads to let people know that for 
a fee he could supply deposits for anyone who needed a loan and wanted to get 
his own linked-financing deal going. Renda placed ads in major newspapers, 
including The Wall Street }oumal, the Los Angeles Times, and the New York 
Times, which read: 

Borrowing obstacles neutralized 
by having us deposit funds with 
your local bank: New tumstyle 
approach to financing. Write to: 
FUND, Suite 31 1,1001 Frank- 
lin Ave., Garden City, NY 11530 

Tap-dancing to Riches ■ 95 

After these ads came out Renda was besieged by brokers or borrowers around 
the country who agreed to compensate Renda (in a variety of ways) if he would 
steer deposits to a thrift or bank that had already agreed to make them a loan 
upon receipt of the deposits. So, in addition to the "special deals" Renda had 
going with Franklin Winkler and others, he began supplying funds for other 
people's special deals as well. Later he would testify in court that he placed 
deposits for "hundreds" of special deals arranged by others. 

These were perfect scams. Renda used other people's (federally insured) 
money to influence bank and thrift officials to make loans to the phony 
borrowers — the officials could even use the actual cash from Renda's deposits 
to make the loans. Ail Renda had to do was break the money into $100,000 
chunks so it would be insured by the FSLIC. Even if Renda's scam eventually 
caused the bank to collapse ( the loans were not repaid), Renda had no 
worries — his deposits were insured and his straw borrowers already had the loans. 
Renda saw the possibility of arranging linked-financing scams at thrifts all across 
the nation. He could borrow hundreds of millions of dollars before anyone 
caught on, and then he could move the scheme on to the next institution. He 
knew over 3,000 thrifts and thousands more small banks that might take the 
bait. Even in Ed Gray's darkest nightmares over the potential evils of brokered 
deposits, he had never imagined abuses worse than the ones Mario Renda had 
in mind. 


Buying Deposits 

When regulators removed most restrictions on brokered deposits, beginning in 
1980, officers at many financial institutions got in line to use the services of the 
new deposit brokers who set up shop around the countn'. Among the institutions 
whose officers saw the advantage of using brokered deposits was Penn Square 
Bank, a small shopping-center bank in Oklahoma City, and soon the officers 
on the bank's money desk knocked on Mario Renda's new door at First United 
Fund. The bank's officers used the brokered deposits from First United Fund 
(and from other deposit brokers) to finance risky lending in the oil business, 
which was booming. ' In July 1982, Penn Square Bank collapsed, the sixth largest 
commercial bank failure in U.S. banking history.^ 

Thus it was that on September 30, 1982. at the very moment Winkler's and 
Renda's operation at Indian Springs State Bank was coming to life, Renda got 
some very unwelcome attention. Representative Fernand St Germain (D-R.I.), 
chairman of the House Banking Committee, conducted hearings into the Penn 
Square Bank failure and wanted to know, among other things, what role deposit 
brokers had played in the Penn Square disaster.' He summoned Renda and 
others to testify before the committee. The hearings put the spotlight on deposit 
brokers like First United Fund and threatened to result in a curtailment of their 
activities. By this time, however, the Reagan administration had put its fijll 
political muscle behind deregulation, and Treasury Secretary Donald Regan 
(a.k.a. "the father of brokered deposits") had the president's car. Washington 
was marching in unison on a deregulation course that c\en the Penn Square 
catastrophe couldn't head off, and deposit brokers survived their congressional 
grilling unscathed. 

Emboldened by this close encounter, Renda saw no need at all to stop his 
operation at Indian Springs bank. It went off like clockwork: 


Buying Deposits ■ 97 

First United Fund proceeded to place $6 million in deposits at Indian 
Springs State Bank; 

Daily's straw borrowers received $^.7 million in loans; 

The straw borrowers were paid their fee and they turned the loan proceeds 
over to Daily, Winkler, and Renda. 

Renda became bullish on the future. He moved First United Fund from its 
cramped offices on Old Country Road in Garden City, out in suburban Long 
Island, to elaborate suites on Franklin Avenue. He maintained a bull pen of 
brokers who spent their days on the phones placing deposits at institutions around 
the country. In late 1982 he employed 15 brokers (later to swell to 40) in First 
United's bull pen, and many of them were pulling down six-figure commissions. 

But Renda's methods and those of a handful of other deposit brokers attracted 
still more unwelcome publicity. After a few large credit unions complained that 
their accounts had been "bilked" by such brokers, NBC-TV produced a news 
documentary on the problem and they interviewed Renda for the piece. Renda 
relished the exposure. After standing up to congressional scrutiny, he had become 
cocky. Following the airing of the NBC program he would end his morning 
peptalk to his staff by standing up and saying, "Okay, boys, get out there and 
bilk em." 

A frequent visitor to Renda's new offices was Salvatore Piga, whom organized 
crime investigators identified to us as a Lucchese (Mafia) family associate. An 
assistant U.S. attorney described him as a "ruthless leg breaker," and his rap 
sheet showed a string of arrests for grand larceny, assault, robbery, burglary, 
extortion, and criminal possession of stolen property. Mario, on the other hand, 
called Piga a "teddy bear." Piga was in his early fifties, stocky, and in top physical 
shape, and he carried what the bull-pen brokers called a "cannon" under his 
coat. Sal, with his gun bulging, added more than just a touch of color around 
First United Fund. 

As 1983 began the future was looking good at First United Fund. Mario 
and his brokers had placed $2. 5 billion in 1982 and expected business to increase 
dramatically in 1983. Renda bragged widely that he could put $50 million into 
any institution on a day's notice. One day Winkler visited a banker and put 
forward the familiar linked-financing scheme. The banker was skeptical that 
Renda could actually produce the deposits. Winkler picked up the phone and 
called New York. 

"Mario," he said, "deposit $1 million in this bank tomorrow morning." To 
the banker's amazement, it was done. What more needed to be said? 

Franklin, Leslie, and Mario frequently visited each other in Hawaii and 
New York. Renda was becoming an important man in Hawaii, thanks to the 


straw borrowers' money, much of which was going into Hawaiian real estate. 
When we looked at Renda's Hawaiian activities, we found ConsoHdated Savings 
owner Robert Ferrante/ Rcnda and Ferrante were in\olved together in a com- 
pany called Seaside Ventures, which was converting an old hotel into offices. 
Attorneys for the FSLIC said Consolidated Savings made Seaside Ventures a 
$2.2 million loan. Renda later testified that he wired the money straight to his 
personal Swiss bank account. Walter Mitchell, the Rcdondo Beach city coun- 
cilman who went to prison after being accused of taking a bribe from Ferrante, 
got a job with Seaside Ventures in Hawaii after he got out of prison. (Part of 
his conviction was later o\erturned.) 

When we found out that Renda and Ferrante were doing more than deposit 
business together, we looked deeper into their relationship. We discovered they 
had been associates for several years, and we obtained documents that showed 
they were also invoked together in at least hvo other major projects, the Kailua 
Shopping Center in Hawaii and the Palace Hotel in Puerto Rico. (The casino 
deal was never completed and the project ended in bankruptcy.) An FSLIC 
attorney later told us that Renda and Ferrante \acationed together in the Ca- 
ribbean in 1986, renting First United Fund's 100-foot yacht Surrenda for the 
occasion. Ferrante, invoices show, paid the boating tab with a $15,000 Con- 
solidated check. Poking around these leads, we found out that the FBI in Los 
Angeles had a keen interest in the Ferrante-Renda relationship. Maybe that was 
why the folks at Consolidated were unusually concerned that Renda's association 
with Ferrante not become general knowledge. On at least one occasion, S&L 
records showed, Ottavio Angotti chastised a secretary who had written "copies 
to Mario Renda" on the bottom of a memo. Angotti X'ed out Renda's name 
and told her she was not to do that again. 

Renda was building an empire in Hawaii, but his well-oiled machine sud- 
denly developed a squeak in Kansas City. In February 1983, FDIC examiners, 
who had given the Indian Springs State Bank boob a thorough going-over, said 
they weren't fooled by Winkler's and Daily's straw borrowers and declared that 
the numerous Hawaii loans, which totaled $3.7 million, were in reality one big 
loan. Examiners still weren't clear about what was going on there, but they were 
sure all these loans were part of one big venture of some sort. Since loans-to- 
one-borrower limits at Indian Springs State Bank were then about $350,000, 
examiners had identified what one former Indian Springs official termed "a 
monumental loan-limit violation." Regulators told Lemaster that these Hawaii 
borrowers had to repay the loans. 

Lemaster gave Daily the bad news: Regulators had ordered that the Hawaii 
loans be repaid and no further loans made. The original plan to roll the loans 
over (renew them) through Indian Springs bank when they came due was now 

Buying Deposits • 99 

out of the question. But Winkler and Daily told Lemaster there was no way 
they could repay the loans. The money was long gone. If was then that Lemaster 
began to see he was caught in a trap. Renda had anesthetized his sound banking 
instincts with First United Fund's brokered deposits, which Lemaster had hoped 
to use to build Indian Springs State Bank into one of the leading banks in the 
state. But now his reputation for integrity, cultivated through years of hard work 
and dedication, was in real jeopardy. Acquaintances said it was at this point that 
Lemaster "began to go over to the dark side." Apparently he saw he had litUe 
to lose. The metamorphosis was startling to those who had known him for years. 
He lost his dignified ambassadorial air and replaced it with glitz, adopting Russo's 
more flashy image. 

But Lemaster's problems in no way dampened Anthony Russo's enthusiasm 
for Renda's linked-financing scheme. Regulators learned that Russo had been 
holding seminars around town to teach other bank and thrift officials how they, 
too, could attract Renda's brokered deposits and then loan the money out to 
Winkler's and Daily's "qualified" investors as built-in customers. Renda paid 
Russo a finder's fee for bringing new institutions into the fold. Russo later 
admitted that, thanks to his efforts, just as Winkler and Renda were wondering 
how they were going to replace Indian Springs State Bank as a source of money 
a new convert showed up to fill the gap — Coronado Savings and Loan, a neighbor 
in the shopping center with Indian Springs State Bank. Renda promptly brokered 
$4.7 million into Coronado Savings, and Coronado in turn loaned Winkler, et 
al, $3. 3 million. Renda discovered that savings and loans were even easier targets 
than banks because, on the whole, their management was less sophisticated. 

"Renda used to tell his troops at First United Fund that as stupid and sheeplike 
as bankers were, savings and loan officials were on an even lower grade of 
intelligence," an investigator recalled later. "Consequently, Renda began fo- 
cusing a great deal of energy on linked financing with savings and loans." 

By May 1983 Lemaster was under severe pressure from regulators to resolve 
the Hawaii loan violation. In desperation, Lemaster bypassed Winkler and Daily 
and wrote directly to their straw borrowers, informing them that their loans were 
coming due and had to be repaid in full. Lemaster's letter came like a bolt of 
lightning out of a clear blue sky for the straw borrowers, who then converged 
on their keeper, Sam Daily. They'd been told by Daily not to worry about their 
loans, so why was Lemaster threatening them, they wanted to know. Daily 
turned to Winkler for help, demanding that he tell Renda to pump more money 
into the operation. 

Despite all this regulatory attention being given to Indian Springs State Bank, 
bank examiners discovered, Anthony Russo regularly attended bank loan com- 
mittee meetings in which bank directors discussed the bank's most important 
business — in clear disregard of earlier demands made by regulators that his 
activities at the bank be confined to drumming up new business. He exerted 


significant influence over daily operations at the bank. To make things even 
worse, examiners discovered that some of the Civella-related loans were in 
default. Those were no ordinar)' customers and the bank was having a hard time 
finding a law firm brave (or foolhardy) enough to tn- to collect on their loans. 

"Law firms wanted no part of those particular cases," one former Indian 
Springs State Bank official told a reporter.^ 

This wasn't the kind of "new business" the board of directors had had in 
mind when they let Lemaster talk them into hiring Russo, and they told Lemaster 
to fire him. At first Lemaster resisted, but minutes of the June 1983 meeting 
showed that the board complained bitterly about Russo's alleged mob customers 
and about the Hawaii loans, uhich, after all, Russo had brought to the bank. 
At last Lemaster relented, agreeing to have Russo out by the end of the month. 

With all this turmoil in Kansas City, no one was paying any attention to 
Sam Daily in Hawaii. Lemaster, Winkler, and Renda had their own problems 
as the scheme began to unwind, and they left Daily to twist in the wind. In 
desperation. Daily began penning a series of angry letters to Winkler, letters 
filled with accusations that Winkler and Renda had misled him, cut him out 
of his share, and left him to face the bank and the straw borrowers alone. Daily 
demanded that Renda use some of the loan proceeds he'd stockpiled to pay off 
the straw borrowers* loans at Indian Springs State Bank. The response Daily got 
from his first few letters was silence. He was furious. 

On the evening of June 16, 1983, Franklin Winkler was relaxing in his 
Honolulu home when the phone rang. He got up from his easy chair and took 
the call. It was Sam Daily. Almost immediately a \ollcy of shots rang through 
the house as an assassin, with a clear view of Winkler through the living-room 
window, opened fire. P'ranklin was hit three times, once in the arm, leg, and 
hand. No one was c\er charged with the attempted murder. But nine days later 
Renda wrote in his desk diar>' that Winkler had called to say he suspected Daily: 

Sam (Daily) wrote ultimatum letter signed "or else." . . . Franklin didn't 
want to discuss particulars on phone . . . will meet in NYC Thursday. 

Winkler rehirned to work in his Honolulu office a week later with a cast on 
his wrist but otherwise fit. His employees had hoped for a longer convalescence. 
His office manager, Chuck Downing, wrote in his desk diary on June 25: 

F.A.W. back in office for first time since shooting, wearing a cast on his 
wrist. My staff worried about going into his office and getting in the way of 
the next bullet. 

By this time Daily was completely out of money. His wild letters had con- 
vinced Winkler and Renda that he was a real threat to them. He was talking 

Buying Deposits • 101 

too much. Daily wrote Winkler again, accusing him and Renda of all manner 
of underhanded double dealing, outlining his gripes in painful detail. On July 
18 Winkler, trying to quiet the volatile Daily, shot off an equally detailed letter 
addressing Daily's complaints one by one. 

Winkler reminded Daily that in 1982 both of them had been in dire financial 
straits, facing foreclosure on all sides, and that it was he, Winkler, who had 
come up with a scheme and let Daily in on it. 

"Anyway the main point I am trying to make," Winkler wrote, "is that 
in some form or another we were able to obtain approximately $1,400,0U0 in 
cash to both of us in 1982 which amount allowed both you and I to stay in 

At about the same time, thousands of miles away in Kansas City, William 
Lemaster's son, a Missouri doctor, began to receive strange phone calls. When 
he picked up the phone there was only long silence on the other end until the 
caller finally hung up. His father's white Lincoln Continental was vandalized 
several times over a two-week period. 

"Someone was trying to rattle his cage," Lemaster's son said. 

In the early morning hours of July 22, 1983, William Lemaster left a family 
party to drive home. Shortly thereafter a witness saw Lemaster's Lincoln cross 
a narrow bridge in Lexington, then suddenly make a wide U-turn at the end of 
the bridge and speed back across the bridge, heading in the direction from which 
it had come. When the car reached the end of the bridge it shot forward, as 
though someone had pushed the accelerator to the floor, leapt a curb, and 
slammed full speed into the concrete foundation of a roadside war memorial. 
The car burst into flames, burning the 59-year-ofd banker's body beyond rec- 
ognition. What was left of the body, a handful of ashes and bone fragments, 
was swept up and officially cremated the next morning. 

The incident could not have been an accident, according to investigators, 
but for several reasons it also didn't seem like suicide. When Lemaster had left 
the family gathering at 2 a.m., he had not given his family any hint that he 
intended to kill himself five minutes later. He had said no long good-byes, left 
no notes, made no final arrangements. The man who witnessed the accident 
said he could not identify Lemaster, or anyone else, as the driver of the Lincoln, 
so people began to wonder if Lemaster had really been in the car. Or if he had, 
had he been dead before the accident? they wondered. Maybe he had been 
drugged. Investigators determined that the fire had begun in the back scat, a 
place that contained no flammable liquid, a place where car fires seldom start. 
Further, the fire was a furious one that instantly consumed the entire passenger 
compartment. The fierce flames left no body to autopsy and made identification 
of the corpse impossible. 


Could it have been murder? some asked. "It's a possibility," the young 
Lemaster said. "I would guess there were a few who had motives. "'' 

While Lemaster's problems were over, his associates were left to deal with 
the fallout from his linked-financing arrangement with Renda. By midsummer 
1983 most of the $6 million in Hawaii loans made by Indian Sprmgs State Bank 
were in deep default and the bank was crawling with FDIC regulators. Over at 
Coronado Savings, FSLIC auditors had just found the new loans to the Hawaii 
partnerships, $3.7 million in all, that were also already in default. 

In Hawaii, Daily was becoming increasingly frantic . . . and noisy. On 
August 8 Winkler called Renda, who jotted in his desk diary, "Franklin informed 
me that Sam Daily stole all the office furniture and equipment [from the part- 
nership offices in Hawaii]. "The following week some of the employees in Hawaii 
were told not to come to work because there was no money to pay them. 

On September 6 Franklin Winkler penned a four-page letter to Daily (who 
was, after all, right there on the Hawaiian island of Oahu with him, merely a 
local phone call away. But maybe, after the shooting, Winkler didn't take phone 
calls any longer). Franklin's letter simply said: 

/ learned that you are using me as a scapegoat to blame all of the wrongdoings 
on me so that you can exonorate [sic] yourself of any wrongdoings, & create 
an image of credibility for yourself. . . . Mario is aware of all these items 
and his only comment was that in the event you visit regularly a psychoan- 
alyst, neither him nor I would have sufficient money to pay for such psy- 
choanalyst to fully complete his cure on you. 

On September 14 the FSLIC slapped a cease-and-desist order on Coronado 
Savings, stopping the thrift from making any future loans to the Hawaii part- 
nerships or renewing the old ones. But regardless of these troubles, Renda and 
Winkler were reluctant to bid farewell to their beloved scheme, and a month 
after Coronado was lost to them, Renda's Hawaii office hosted lavish parties for 
bankers and savings and loan executives attending separate conventions there. 
It was an opportunity to find some new pigeons, and Renda spent $12,000 on 
the parties and sent several New York executives with their wives to assist in the 
grand event. He rented limousines to bring guests to the parties from their hotels. 
His employees were instructed to explain, if anyone asked, that the office 
furniture — which had been repossessed days earlier — had been moved out to 
make room for the party. 

But keeping up appearances did nothing but infuriate Sam Daily, who was 
still trying to get Renda to pay off the Indian Springs loans so the straw borrowers 
would leave him alone. He did not appreciate having been left to juggle a 
crumbling empire of overencumbered properties with crushing negative cash 
flows and a small army of straw borrowers who were just now realizing that they 

Buying Deposits '103 

had been had. On November 20, 198?, Daily penned another of his famous 
letters. This time he tried to get Franklin Winkler on his side by blaming Renda 
for all the troubles. 


. . . I am sick and tired of protecting someone who has destroyed me. My 
firm intentions are that if Mario Renda refuses to do his part in helping us 
resolve these problems then I am going to hold a news conference with the 
Kansas City Business journal and Kansas City Star, and i am going to tell 
them the whole sordid affair as it concerns First United Fund and Mario 
Renda. I want you to make Mario Renda well aware that 1 believe he deals 
with the Mafia and with known hit men. I had his one-eared friend checked 
out when he arrived in Honolulu, and he was rated as one of the top hit men 
in the United States. (An investigator told us he heard that Renda had sent 
Salvatore Piga — who was rumored to have lost a chunk of an ear when it 
was bitten off in a fight — to Hawaii to discover who shot Winkler. History 
has not recorded whether or not he was successful.) 

In the event Mario Renda thinks that he would like to place a hit on me, I 
think you should tell him that that would probably not be too wise. I have 
sent another letter, in my best literate terms, outlining the whole series of 
events that have occurred as I know them concerning his business dealings 
and his association with the New York hit man. Should anything happen to 
me or my family I have three prominent attorneys who have a copy of that 
letter. Those three prominent attorneys are very good friends of mine. I can 
assure you that they will see Mario Renda behind bars if anything happens 
to me. I think he knows that I have the moral responsibility, the moral 
fortitude, and the pure guts that are necessary to see his company destroyed 
by revealing to the public the manner in which he carries on his business 
affairs and his involvement with Indian Springs State Bank. 

First United Fund's high-water year was 1983, even though the Kansas City 
scams were falling apart. Renda 's salary in 1982 had been $150,000. In 1983 
he voted himself a bonus of $300,000 and in 1984 he would vote himself a 
bonus of $400,000." First United Fund now had offices in Garden City, New 
York, in Woodland Hills, California, and in the Grosvenor Center in Honolulu. 

But by late 1983 Renda's empire was seriously threatened, not by federal 
regulators, or by the FBI, or Sam Daily, but by Richard Ringer and Bart Fraust, 
two reporters working for the century-old newspaper the American Banker. Ringer 
first dented Renda's armor when he set out to cover the indictment of an East 
Indian who used Renda's linked deposits to swindle a number of small Midwest 
banks out of tens of millions of dollars. The American Banker story swept through 
the financial markets and First United Fund started losing customers right and 


left. Renda became obsessed with the stor\' and he filled his desk dian^ for weeb 
with increasingly frantic scribblings: 

Article in American Banker appeared very negative. Many clients called also 
negative after article. Prudential Bach will no longer do business or finance 
with First United. Very Damaging. 

A.G. Becker cancelled us out. No more business because of American Banker 
Article. Contacted FBI for help. 

Rumors on the street REALLY BAD. Street filled with rumors. No chance 
anyone will do business with us now. 

Steve called to say Saudi's might not do business with us now. 

On August 16, 1983, Renda filed a $90 million lawsuit against the American 
Banker for libel.' (Some time later Richard Ringer was jogging after work when 
a green Mercedes-Benz pulled alongside. Two well-dressed white men stepped 
from the car, walked up to him, and proceeded to administer a thorough beating. 
With their work done, they slipped back into the Mercedes and drove away. 
Neither man said anything to Ringer, but he certainly felt the beating could 
have been a message from Renda.) 

In January 1984 the Kansas state bank commissioner determined Indian 
Springs State Bank was hopelessly insolvent and closed the bank down. (In 
December, Anthony Russo had suddenly quit, though he remained a director 
of the bank's holding company. No doubt he saw what was coming and figured 
the regulators who took over the bank wouldn't be developing his kind of "new 
business.") A team of examiners and attorneys moved in and began the tedious 
process of verifying bookkeeping entries line by line and examining each loan 
word by word to determine the true financial condition of the institution. The 
president of the bank, William Lemaster, who presumably would have had 
information crucial to the FDIC's understanding of what had happened at Indian 
Springs State Bank, was (reminiscent of Centennial's Erv Hansen) dead.'' Un- 
raveling Indian Springs State Bank was going to be a mess. 




Renda Meets the Lawyer 

from Kansas 

In Washington, Ed Gray had been working for months on his regulation that 
would deny FSLIC coverage to brokered deposits. He got the support of Bill 
Isaac, chairman of the FDIC,' and then he had to convince his fellow FHLBB 
members of the importance of the move. He had powerful statistics to make his 
point: use of brokered deposits was increasing at a frightening rate, from $3 
billion industry-wide at the end of 1981 to an estimated $29 billion at the end 
of 1983.2 

On March 26, 1984, the FHLBB approved the regulation, to go into effect 
October I . ' The period between approval of the regulation in March and its 
scheduled implementation date in October would prove to be a period of bitter 
regulatory war. Suddenly stories began to be leaked to the Washington press that 
Gray was abusing his expense accounts, that he might be under FBI investigation, 
and that he was a dullard who took hours to make even the simplest decisions. 
A story circulated that Gray had arranged a conference call with the district bank 
presidents and kept them all waiting on the line for an hour and a half while 
he agonized over artwork to be used in an in-house publication. Gray said the 
story was a complete fabrication. 

In March 1984 Representative Doug Barnard (D-Ga.)'' conducted new 
congressional hearings into the brokered-deposit issue, and the debate was heated. 
Once again Mario Renda was called to testify. When questioned specifically 
about his activities, he lied, denying any involvement in linked financing or in 
any other activities that would contribute to destabilization of financial insti- 

Barnard had submitted written questions to the FHLBB and the FDIC, and 
their written responses' were a tough, frank indictment of brokered deposits. The 
regulators complained about linked financing, and they used First United Fund 
as their key example.* They also complained that they were afraid the easy 



money would encourage risk-taking by thrifts looking for quick profits in high- 
risk investments. Gray said thrift failures could cost the FSLIC $2.2 billion (out 
of a $6 billion to $7 billion rcser\e) in 1984, more than double the $1 billion 
loss in 1985, and he was convinced that brokered deposits were an important 
part of the problem." 

The U.S. League, alarmed by Gray's doom-and-gloom message about the 
FSLIG fund, complained that Gray was nothing but a Johnny-One-Note. Such 
talk could only serve to scare the public away from thrifts, William O'Connell, 
League president, warned. If Gray didn't keep quiet, he would cause runs on 
thrifts across the countr\'. In Gongress legislation was introduced for the U.S. 
League that would have effeeti\ely gutted Gray's brokered-deposit regulation. 
Stumping for passage of the bill was the staff director from the Senate Banking 
and L'rban Affairs Committee, Danny Wall. (Wall would replace Gray as 
FHLBB chairman in 1987.) 

One of Gray's most vocal critics during this lengthy battle was his old friend 
Galifornia S&L Gommissioner Larr\' Taggart, who in March 1984 took the fight 
into Gray's territorv' when he traveled to Washington to tell a banking law- 
conference that brokered funds represented 80 percent of the new money pouring 
into S&Ls. Cutting off that supply, he warned, could do great damage to the 
institutions. Any abuses related to brokered deposits were not the fault of the 
brokers, he claimed, but were the fault of S&L managers who used the money 

The deposit brokers weren't going to let Gray put them out of business 
without a fight. First Atlantic Investment Corporation Securities, Inc. (FAIC) 
of Miami and the Securities Industry Association sued in federal district court 
to have Gray's brokered deposit regulation overturned. On June 20, 1984, FAIC 
won a sweeping vietorv' when federal judge Gerhard Gessell ruled that the broker 
ban was illegal and that action for such a ban had to come from Congress, not 
from the Bank Board. (Later FAIC would have the dubious distinction of having 
brokered the second highest [second to First United Fund] number of deposits 
into institutions that would later fail.) Gray then suggested Gongress give the 
FHLBB and the FDIC the authority to impose such a ban, but Congress ignored 
his request. Danny Wall and members of the Senate and House banking com- 
mittees breathed a collective sigh of relief. Their high-flying thrift constituents 
who'd opposed the ban were happy, and presumably their happiness would be 
reflected in their campaign contributions. Gray's many enemies could finally 
take pleasure in seeing him publicly humiliated. 

Emboldened, the news leakers'* picked up momentimi. Word spread that 
Gray would not survive this defeat and was on the way out. In Juh' a story broke 
in the Washington Post that Gray was under investigation by the FBI for un- 
derreporting expenses tied to the renovation of his office. Gray was also being 
investigated, the Post said, for abusing a $1,500 Bank Board expense account 

Renda Meets the Lawyer from Kansas ■ 1 07 

that was .supposed to be used for entertaining Bank Board guests. Gray and his 
staff had supposedly used the money for staff lunches and cab fares. Gray denied 
any wrongdoing, pointing out that the lunches were tuna sandwiches he had 
brought in so he and his people could work late. I'he FBI cleared Gray of these 
charges, but the summer of 1984 was not a good one for Gray or for his fight 
to save the thrift industry from itself 

Mario Renda had had a tough summer as well. Soon after the Barnard 
hearings the American Batiker sent a second salvo across Renda's bow (certainly 
a courageous move for a publication recently sued by Renda for $90 million). 
It was a lengthy piece headlined "Bank Board Document Lists Money Broker 
'Horror Stories'; Abuses Include Questionable Loans in Exchange for Deposits," 
and it named First United Fund as one of the brokers involved. All hell broke 
loose. And a second wave of customer defections engulfed First United Fund. 
Once again Renda's desk diary was peppered with apocalyptic notes: 

Account exec's reporting clients are uneasy about doing business with us. 

A.G. Becker said no business, cash or otherwise because of the American 
Banker article. We're out of commercial paper business altogether now — gave 
us 90 days to clear out. 

In May 1984 Franklin Winkler's Bank of Honolulu accounts were seized by 
the IRS. Apparently Winkler had failed to report something. Then more trouble 
when the FHLBB began an internal investigation of linked-financing deals in- 
volving deposit brokers and Ed Gray subpoenaed Renda's records. The New York 
Times ran a piece headlined "Money Broker's Books Subpoenaed," which dis- 
closed that the FHLBB had subpoenaed First United Fund records to "determine 
the role it has played in about 20 banking institutions that have failed or are 
regarded as being in danger of failing." 

Renda had responded in advance to the Times reporter's written questions 
with the following written responses: "We are not 'involved' in bank failures. 
We are the brokerage house that the greatest number of banks in the U.S. 
uses. We have quoted rates for over 1,000 banks. If 2 percent, or 20 of those 
banks, fail, naturally our name stands a good chance of being mentioned 
in each instance. " Did First United engage in linked financing? "This is ab- 
solutely untrue. Neither First United nor any of its subsidiaries have ever 
borrowed any money whatsoever — nor have any of its officers borrowed 
any money whatsoever — from any banking institution for which we have quoted 

Bank records would later show that Renda was lying. In fact, at that very 


time he had just teamed up with a Houston-based swindler to pull a linked- 
financing swindle on Rexford State Bank in Rexford, Kansas. The Rexford State 
Bank scam was a classic bust-out in which they took out $2 million in loans in 
about three months and left the small 82-year-old bank insolvent. Why would 
Renda take the risk of continuing his "special deals" after Indian Springs State 
Bank was closed, when he must have known regulators were starting to scour 
Indian Spring's books trying to find out what went wrong? 

"Renda felt he had nothing to worry about," said one source close to the 
FDIC. "He knew that, in those days before everyone wised up, the FDIC and 
FSLIC would send in two separate teams of auditors when they seized a bank 
like Indian Springs. One team would only look at the deposit side of the operation 
and the other the loan side. The two teams of auditors never ever compared 
notes. So he thought they'd never make a direct connection between First United 
Fund deposits and the Hawaii loans." 

Renda was still brokering an enormous amount of deposits, and personal 
financial statements showed that by 1984 he was a very wealthy man. He sur- 
rounded himself and First United Fund with the trappings of success, including 
a $1.2 million BAC-111, an 80-seat jet that had been converted to a luxury 
corporate floor plan." Renda already had purchased a $69,000 Rolls-Royce Silver 
Spirit and bought a second. To keep his wife, Antoinette, happy, he invested 
in a little jewelry, two rings worth $306,000 (a platinum ring with a 10.5-carat 
pear-shaped diamond and two baquettes, and an 18-carat gold ring with a 17.35- 
carat emerald-cut diamond and two triangular diamonds). For his desk nothing 
would do but a $1,100 silver inkwell and a $1,150 silver cigar box with two 
matching silver liquor canisters. For balance there was the $6,050 English silver 
tea and coffee service. Underfoot a $26, 500 Kerman rug, a $7,000 Ant Bahktiari 
rug, and a $6,000 Tabriz rug. He finally had the Khashoggi life-style he had 

As we unfolded the Renda story we began to wonder how many banks and 
thrifts Renda had infected and how many had succumbed.'" We soon found 
out that no one had any idea. In October 1988, from a confidential source close 
to the Federal Resene Bank, we did get a partial list of institutions known to 
have been used by Renda. There were 160 banks and thrifts on the list, scattered 
from coast to coast and even in Puerto Rico, and 104 had alreadv failed. It 
became clear to us that the damage Mario Renda had done and was doing to 
thrifts and banks would be years in the unfolding. 

In early 1984 the Indian Springs State Bank and Coronado Savings and 
Loan receiverships continued to try to figure out who owed what to whom at 
the two failed institutions. The FDIC and the FSLIC in Washington hired the 
Kansas City law firm of Morrison, Hecker, Curtis, Kuder & Parrish to handle 


Renda Meets the Lawyer from Kansas • 1 09 

some of the legal work, and one of the attorneys they assigned to settle some of 
the bank's problem loans was Michael Manning. Manning was a principled, 
hardworking Kansas lawyer in his mid-thirties. With no premonition that this 
would be anything but a routine bank ease. Manning began as usual by dividing 
up the bank's problem loans with other attorneys in the firm. By pure chance 
he ended up with most of the Hawaii loans in his stack. When he looked over 
what he thought were about 30 simple collection cases, he was first puzzled that 
a small, landlocked bank in America's heartland would have loaned so much 
money on Hawaii real estate projects. A bank examiner shared Manning's puz- 
zlement: "What in the world was a fly-shit bank in the basement of a shopping 
center in a suburb in Kansas City, Kansas, doing making these kinds of loans?" 
(The bank wasn't actually in the basement, but it was partially underground.) 

One night Manning stayed late at his office and spread the loan files out on 
a table to study them together. He immediately spotted startling similarities. He 
noticed, for example, that many of the borrowers said they intended to use their 
loan to invest in the same limited partnerships. These were the same similarities 
that had driven bank examiners months earlier to determine that the many 
separate loans to the Hawaii partnerships were really part of one big loan. But 
the examiners had not pursued that insight beyond the point of demanding that 
Lemaster clean up the loans. If they had, they might have nipped Renda's scheme 
in the bud, thus saving dozens of financial institutions from Indian Springs' fate. 
Now Manning had picked up where the bank examiners had left off. He didn't 
know what the unifying factor was yet, but these were not unrelated loans. He 
decided to fly immediately to Hawaii to ask these borrowers some questions. 

He took 30 depositions, in about that many days, from the Franklin Winkler- 
Sam Daily straw borrowers in Hawaii. Getting straight answers out of them was 
tough at first. They believed, the borrowers said over and over, that they were 
not responsible for repaying the loans. Winkler and Daily were, they said. The 
straw borrowers had broken federal law by allowing their names to be used on 
fraudulent loan statements, but they claimed they were as much victims as the 

From those depositions emerged a fuzzy picture of only the Hawaiian end 
of the operation. But Franklin Winkler and Sam Daily were clearly implicated 
in some larger scheme. Some of the borrowers mentioned someone in New 
York named Mario Renda. And the borrowers had bits and pieces of information 
concerning similar deals in other places like Texas and Los Angeles, but how 
those events tied together was still unclear. What Manning did know for certain 
was that he had stumbled upon an enterprise that reached far beyond his stack 
of 30 defaulted loans. 

One Hawaii borrower realized immediately that Manning's questions were 
leading somewhere other than to a simple resolution of some overdue loans. He 
dug in his heels and took the fifth amendment 52 times during Manning's 


deposition. IronicalK , the questions he refused to answer clued Manning in to 
the sensitive areas. Manning also deposed Franklin Winkler. Charming and 
friendly as usual, Winkler nevertheless took the fifth amendment to every ques- 
tion Manning asked him — even his name — for three days. 

Manning went home to Kansas City more convinced than ever that he was 
onto something important. He began to keep a daily diar\' of clues, often isolated 
notes that made little sense but "seemed" important. The case was beginning 
to consume him. It was on his mind all the time. What had been going on at 
Indian Springs State Bank? It seemed to be bigger than Franklin Winkler and 
Sam Daily, somehow. Other states were involved, the borrowers had said. Were 
other banks in danger? he wondered. How widespread was this enterprise? Man- 
ning spent his days, nights, and weekends trying to piece together the answers 
to the puzzle. 

Finally, after weeks of struggling with his conscience, the straw borrower 
who had taken the fifth 52 times phoned Manning and said he wanted to talk. 
He then exposed Mario Renda's key role in the scheme. There was a depjosit 
broker in New York, he said, who had made "courtesy deposits" at Indian Springs 
State Bank. In turn, the bank loaned money to straw borrowers who gave the 
money to Franklin Winkler, Daily, and Renda and companies and limited 
partnerships they controlled. Manning realized now that he was dealing with a 
sophisticated form of linked financing, structured through a maze of interlocking 
partnerships and companies until it became almost impossible to detect. Who 
knew how many other banks and thrifts might have also been victims, he thought. 

Though hired by the regulators" to pursue civil actions against those who 
ovxed money to Indian Springs State Bank and Coronado Savings, Manning felt 
he now had absolute evidence of criminal bank fraud (admissions from the straw 
borrowers) and he convinced Kansas City FBI Agent Ed Leon of his case. Leon, 
and later Manning, took this e\idence to an assistant U.S. attorney in Kansas 
City, Kansas, expecting that she would immediately open an investigation. In- 
stead they ran head-on into the frustrating realities of white-collar crime pros- 
ecution in America. She was not interested in his case, she told Manning. It 
would take too long to "turn." Her office's resources were limited. The De- 
partment of Justice demanded visible results, tangible statistics — indictments and 
convictions, and lots of them. Bank fraud cases took years to unravel. Thanks, 
but no thanks. Incredulous, Manning next carried his evidence to the Organized 
Crime Strike Force in Kansas City, where he got the same cold shoulder. 

Manning reported his findings to Christopher "Kip" Byrne, senior trial at- 
torney for the FDIC in Washington. Byrne had supervised Manning's pursuit 
of the Hawaii straw borrowers and shared his concerns about the strange nature 
of those loans. He had also heard of Mario Renda because of the periodic 
squabblings in Washington about the role of deposit brokers in bank failures 

Renda Meets the Lawyer from Kansas ■111 

since the collapse of Pen n Square Bank in Oklalionia in 1982. Still, no one in 
the Justice Department would move on Manning's information. 

Then, in September 1984, Manning got a break. Six of Renda's bull-pen 
brokers and Renda's personal secretary decided to break with Renda and start 
their own deposit brokerage firm. This resulted in a messy legal battle because, 
before hiring them, Renda had secured a pledge that they would not go into 
competition with him. So when they struck out on their own, Renda sued. The 
seven former employees later explained that they had read the American Banker 
articles about Renda, and one of them went to Washington to try to dig up some 
dirt on their old boss to further their side of the case. Byrne's name had appeared 
in the American Banker stories about Renda, so the former F"irst United broker 
looked him up and offered to trade information. Was Byrne interested? Abso- 
lutely. It looked like Manning finally was going to get the inside scoop on First 
United Fund. But on the heels of the first meeting, just when Manning and 
Byrne were so close to Renda they could smell him, the seven former Renda 
employees settled with Renda and lost interest in their deal with Manning and 

The letdown was intense. To be so close and then to have Renda slip away, 
it was too much. Manning was beside himself. Questions plagued him: How 
big was Renda's operation? How many banks were at risk? The congressional 
hearings, the newspaper stories, all warned of the dangers of brokered deposits. 
Yet here was Manning, with tangible evidence of possible wrongdoing by one 
of the country's biggest deposit brokers, and he was being thwarted at every turn. 
It was crazy. So Manning took off the gloves and played a little hard ball. He 
went back to the six brokers and Renda's former secretary — "The Seven Dwarfs" 
he now called them. He threatened, he promised, he cajoled, he pleaded, and 
he threatened again. Finally it worked. 

Their attorneys agreed to let Manning depose them, and he and Byrne rushed 
to New York before the Dwarfs could back out. Over four days, from dawn to 
late into the night, they took testimony. And when they were finished they had 
collected sworn testimony alleging labor racketeering, pension fraud, wire fraud, 
tax fraud, mail fraud, and bank fraud involving Renda, Winkler, Daily, and 
others. Never in Manning's wildest imaginings had he guessed he'd walked into 
a criminal enterprise of such breadth, such stunning magnitude. Not one of the 
rebel brokers had all the details of the operation, but when combined, their 
testimony was devastating — and the implications for the bank and thrift indus- 
tries, terrifying. 

On the third day of the interrogation Manning learned from a confidential 
source that Sal Piga had phoned Renda to say, "The Seven Dwarfs are talking 
to the FDIC." Manning told us later it was unnerving, to say the least, to have 
Piga use Manning's own nickname for the brokers. The nickname was an in- 


house joke at Manning's office in Kansas. How had Piga. in New York, learned 
of the term? Was one of the Dwarfs a plant? Were Manning's phones or offices 
bugged? What else did Piga know? Later, when two FBI agents went to the home 
of one of the Dwarfs to ask some questions, they found themselves staring down 
the barrel of a shotgun. The Dwarf had feared that the agents were Renda's 

The sworn testimony Manning and Byrne had taken from the Seven Dwarfs 
was valuable and important, but by itself it could not carry the case. They needed 
documents, written proof from the files of First United Fund itself. But during 
the depositions the Dwarfs were adamant. No, they would not provide docu- 
ments. That would be really pushing their luck. They were afraid. Manning 
and Byrne expected too much. Their lives were in danger, it was too much to 
ask. But just when Manning was about to give up, someone on the inside at 
First United Fund suddenly, and without explanation, produced the "smoking 
guns" Manning needed. '- 

Manning, on his way to catch a plane home to Kansas, pulled into a dark 
airport parking lot. He walked around to the back of the car and opened the 
trunk to take out his suitcase. There, in the trunk, was a fat stack of First United 
Fund documents. How they had gotten there Manning would never say. If he 
suspected anyone in particular, he knew it would be foolhardy and dangerous 
to speculate out loud. In ten days that silent stack of documents would collapse 
Renda's world. 

Manning knew they had to move fast. Renda was no doubt prepared to take 
steps to protect himself if he learned they were getting close. Byrne took the 
evidence to Organized Crime Strike Force attorneys in Washington. They lis- 
tened and sent Bryne and Manning and their evidence to the Brooklyn Organized 
Crime Strike Force, saying that Brooklyn Strike Force attorneys might have an 
interest in the case. They did. First United had come up in connection with an 
ongoing investigation the strike force was conducting into racketeering by the 
Lucchese crime family. Through the use of wire taps and bugs approved to 
investigate the suspected mob bribery of Teamster officials at Kennedy Airport, 
investigators had picked up an alleged mobster" talking about how Schwimmer, 
First United Fund's financial consultant, was helping him launder money 
through bearer bonds. '■* 

The name First United Fund, therefore, got their immediate interest. "They 
were willing to sjjend the cerebral energy to understand the case," Manning told 
us later, and he spent the next ten days with them going over the details. Tough, 
straight-talking Assistant U.S. Attorney Bruce Maffeo (ironically pronounced 
like Mafia, with an "o": Mafio) picked up immediately on the importance of 
the case. 

Now they needed to obtain a search warrant for a raid on First United Fund 

Renda Meets the Lawyer from Kansas • 113 

offices. Any documents still there had to be secured before Renda had a chance 
to remove or destroy them. But someone liad to sign an affida\it setting forth 
the legal grounds on which they wanted to execute the search warrant. Manning 
was the obvious choice, since he was the one with the evidence against Renda, 
but Manning was working for the FDIC and had to have their approval for such 
a drastic action. The affidavit would contain slanderous allegations about the 
man who ran one of the largest brokerage firms in the United States. No, the 
execution of a search warrant by Manning, a representative of the FDIC, was 
out of the question, regulators said. At that point Kip Byrne, apparently outraged 
bv the regulators' refusal, intervened. "Permit Manning to sign that search 
warrant or you can take my job and shove it," he said, in so many words. This 
was absolutely insane, he fumed. Was Mario Renda untouchable? 

Voices don't often get raised at the FDIC and such an outburst by their own 
senior trial attorney shocked the stodgy regulators into reluctant action. They 
acceded to his demand ... he just better be right. Ten days after Manning had 
found the First United Fund documents in the trunk of his car, Maffeo's troops, 
30 FBI and IRS agents, assaulted the First United Fund offices at 1001 Franklin 
Avenue in Garden City, New York, with the search warrant in hand. Manning 
and Maffeo had been tipped that Renda was attending an all-day conference 
and would be out of the office — it seemed like a good day to go calling. For 
the next two days they filled box after box with First United Fund's books, 
records, files, and even personal notes. Six days later agents raided Franklin 
Winkler's company in Honolulu, hauling another 100 boxes of files off to Maffeo 
in New York. 

For both Manning's civil case and Maffeo's criminal racketeering investi- 
gation, the haul was a windfall. Among the booty investigators found some 
revealing items — some deadly serious, some humorous. There were verses to a 
tongue-in-check song written for Renda by a First United employee. "The Twelve 
Days of Bilki ng, " which was sung to the tune of "The Twelve Days of Christmas, " 
outlined, stanza by stanza, how brokered deposits were used to con banks and 
thrifts. The last stanza referred to such things as "banks a-failing," "accountants 
auditing," "checks a-bouncing," "cops arresting," and "Steve Black hanging 
from a tree.""" 

Another song penned by Renda employees was entitled "Bilkers in the 
Night," sung to the tune of "Strangers in the Night." 

The songs were amusing. A lot less amusing was evidence that Renda had 
used First United Fund as a giant Trojan horse that had been granted entry into 
dozens of banks and thrifts across the United States. A lot of the names of 
institutions where the Seven Dwarfs had said Renda had special deals going were 
found in the records seized at First United Fund: 


Mission Bank, Mission. Kansas 

Coronado Federal Savings and Loan, Kansas City. Kansas 

The Metropolitan Bank. Kansas City, Missouri 

Metro North Bank, Kansas City, Missouri 

First Federal Savings and Loan. Beloit. Kansas 

Farmers and Merchants Bank, Huntsville, Missouri 

Rexford State Bank, Rexford, Kansas 

Metropolitan Bank and Trust, Tampa, Florida 

American City Bank, Los Angeles, California 

Newport Harbour National Bank, Nev^port Beach, California 

Sparta Sanders State Bank, Sparta, Kentucky 

Community Bank, Hartford, South Dakota 

Western National Bank ofLovell, Lovell, Wyoming 

Emerald Empire Banking Company, Springfield, Oregon 

Knickerbocker Federal Savings and Loan, New York, New York 

State Savings and Loan, Clovis, New Mexico 

Valley First Federal Savings and Loan, Van Nuys, California 

Indian Springs State Bank, Kansas City, Kansas 

First National Bank of Midland, Midland, Texas 

The Teamster and Steelworker pension funds that Renda and his partner 
Schwimmer skimmed from were deposited at: 

First Savings and Loan of Suffolk, Suffolk, Virginia 

Westwood Savings and Loan, Los Angeles, California 

North Mississippi Savings and Loan, Oxford, Mississippi 

Old Court Savings and Loan Association, Baltimore, Maryland 

First Progressive Savings and Loan, Westminster, Maryland 

Sharon Savings and Loan, Baltimore, Maryland 

First Border City Savings and Loan Association, Piqua, Ohio 

Renda Meets the Lawyer from Kansas • 115 

Bank of San Diego, San Diego, California 

Central Illinois Savings and Loan, Virden, Illinois 

Montana Savings and Loan, Kalispell, Montana 

Virginia Beach Federal Savings and Loan, Richmond, Virginia 

Heritage Savings and Loan, Richmond, Virginia 

Comstock Bank, Carson City, Nevada 

Investors Savings and Loan, Richmond, Virginia 

Standard Savings Association, Houston, Texas 

Alliance Federal Savings and Loan, Kenner, Louisiana 

Valley First Federal Savings and Loan, El Centro, California 

Mainland Savings Association, Houston, Texas^'' 

It was a long list and Manning couldn't even be sure it was complete. What 
investigators did notice was that more than just a few of the institutions listed 
also appeared on the FDIC and FSLIC's growing casualty lists. In fact, from 
January 1982 through June 30, 1985, First United Fund was number one in 
the nation in brokering deposits into banks that later failed, 28 in all, even 
though in 1985 it was only thirteenth in the nation in volume of deposits placed.'^ 
In comparison, Merrill Lynch, which brokered nearly 30 times the volume of 
deposits, brokered into only two institutions that closed."* 

It appeared that Renda had supplied money to nearly all the go-go thrifts in 
the country. 

By late in 1984 Sam Daily was all too aware that Renda and Winkler had left 
him to take the rap. Increasingly paranoid, he was certain they were trying to 
frame him. (He would eventually be convicted of conspiracy in the scam.) In 
an apparent attempt to short-circuit such a plot. Daily shot off two pages of his 
famous prose to the Honolulu police: 

Dear Officer, 

If you check your files you will find that some time about a year and a half 
ago, someone tried to put Mr. Winkler's lights out. Fortunately for Mr. 
Winkler they failed. . . . 


After a rambling discourse outlining the troubles he'd seen, Daily finally got 
to the point: 

To that end, I am asking you to investigate this matter so that should one 
of Franklin Winkler's numerous enemy's [sicj eliminate his fat body from the 
face of our good earth. I will not be the suspect. 

A month later Daily sent Winkler a letter that unquestionably outdid all his 
earlier literarv' efforts. This letter, which exposed Daily as an anti-Semite (the 
letter was referred to by investigators simply as "the fat, slimy hymie letter") also 
showed the stress Daily was under: 


I just received your letter. It's really not worth commenting on, except to say 
that I had a friend and client, who is a criminal psychologist, review your 

My friend is a ]ew, and specializes in studying the behavior of the criminally 
insane and mentally ill Jew, under a grant funded by the Nation of Israel. 
The purpose of the grant is to identify Jewish individuals who degrade, by 
actions and deeds, the standards to which the true Jew adheres. 

He said the writer of the letter was obviously a psycho, and probably a fat. 
slimy, hymie and scared as hell. 

I said to my friend, "what is a hymie?" He replied: "Unfortunately, Sam, 
regardless of the high standards to which a group, such as us Jews subscribe, 
there is always that minority who degrade the rest of us. They are present in 
your Protestant Group, in the Catholic Religion, and in all other religious 
and ethnic groups as well. The most demented of the group, to which the 
author of the letter under discussion obviously belongs, is referred to by other 
Jews as a hymie. I believe the word first appeared in the 1920 dictionary of 
the underworld, published in New York." 

I congratulated him on his accuracy, and in our conversation he asked me, 
"Why is the fat, slimy, hymie so scared?" I replied; "my friend, if you had 
done all of the following in three short years, what would your emotional 
feelings be." 

. . . He may have framed [names deleted] and others into a murder for hire 

... He was a major factor in Bill Lemaster, President of Indian Springs 
State Bank, committing suicide, or, "whatever," 

... He stole some $HQO.OOO.OQ from First United Partners Four, with some 
W Partners, all of whom are mad as hell. 

Renda Meets the Lawyer from Kansas ■ 117 

... He stole some $800,000.00 from Haiku Holdings and Haiku Partners, 
with some 27 Partners, all of whom are mad as hell, 

. . . He and an associate made a phone offer to buy a bank to incite the 
bank into making loans which, in part, caused the failure of the bank, and 
an alleged loss of $5,000,000.00 to the shareholders of the bank, [Indian 

... He is being investigated by the FBI on numerous accounts, 

. . . He has over HO lawsuits pending in Honolulu alone, 


. . . He stole in excess of $500,000.00 from me. 

The criminal psychologist interrupted me. "Sam," he said, "/ understand the 
SOB IS a fat. slimy, hymie, crook who has taken some $^,000,000.00 from 
some 50 odd investors in three short years [a reference to Daily's straw bor- 
rowers], and that he is probably going to prison, but that doesn't explain 
why he is so damned scared." 

I replied; "my friend, I spent my time in Korea, Vietnam, Thailand, Laos, 
and other parts of Southeast Asia. I have seen literally dozens of good men 
die. Some died bravely, most prayed, a few begged; all were scared. But in 
all of my experiences, 1 have never seen anyone so afraid of death as Franklin 
Winkler. 1 think the answer is simple. The men I have seen die had a cause 
that involved someone else; that is to say "Duty, Flag, Country, Family, or 
Friends. " They had feeling for others; a sense of loyalty, honesty, truthfulness, 
and fairness to those with whom they dealt. Franklin Winkler has only himself 
and his Dad, who has one foot in the grave and one foot on a banana peel. 
He loves no one, and in turn, no one loves him. He has no God. He has 
only greed. " 

The criminal psychologist said, "Oh, now I understand. It is as plain as day. 
He is a fucking fat, slimy, hymie." 

Franklin, if I were you, I'd be scared as hell, too. You've screwed over 50 
families, ruined them. When you consider that probably 25% of our popu- 
lation, on a random basis, are nuts, there's probably at least 25% of 50 
families out there who are capable of spilling your guts and your nuts on the 
paking [sic] ramp floor, or in the alternative, putting a .38 slug thru your 
demented brain. 

Mind you, I have no interest in inflicting physical harm to your fat, slimy, 
hymie body. I'd rather hand you a bar of soap or a jar of vaseline as you 
walk into Leavenworth [prison], and watch those big mean studs, there for 
violent crimes, line up to screw your fat, slimy, hymie ass. 

Have a good day Franklin, 



Daily's literary thrashings came to naught. He was securely locked in the 
web woven by Franklin Winkler and Mario Renda, a web designed to leave 
them a safe arm's length away from the partnerships when the Hawaii loans 
went into default. On one side of Daily were the FDIC and FSLIC, who were 
looking for millions of dollars missing from their crippled institutions in Kansas, 
and on the other side were the nearly 50 straw borrowers who had been told to 
turn over their loan proceeds to Daily and "not to worr)." 

In early 1985 Manning sued Renda, Franklin and Leslie Winkler, Daily 
and others for $60 million on behalf of the FDIC and the FSLIC* for causing 
the collapse of Indian Springs State Bank and Coronado Savings. The suit 
accused them of racketeering and charged that the defendants had conducted 
and participated in an "ongoing criminal activity." The Manning lawsuit began 
the destruction of Mario Renda's empire.-" 


The End of the Line 

Manning filed the FDIC and FSLIC civil suit against Renda and his cohorts in 
U.S. District Court in Kansas in April 1985. hi the lawsuit was a graphic 
description of Renda's "special deals" at Indian Springs State Bank, Coronado 
Savings and Loan, and Rexford State Bank. The Kansas City U.S. attorney's 
office, whom Manning had implored months earlier to take the case, was be- 
ginning to look more than a little silly. At last the Kansas City Organized Crime 
Strike Force took the matter to the grand jury. They contacted Maffeo and 
requested that he send them copies of the documents he and Manning had 
seized at Renda and Winkler's offices. Maffeo complied. 

Nonetheless, Renda continued to do business out of First United Fund in 
New York, although things got pretty weird around the shop. First United Fund 
now was huge. It managed $5 billion in deposits. Most of its employees had 
nothing to do with Renda's wheeling and dealing but had come to suspect much. 
On the wall in the bull pen at First United was "the big board," which listed 
all the institutions dealing with First United Fund. Over the names of institutions 
that employees suspected were involved in one of Renda's "special deals" they 
would sometimes stick cutouts of army attack helicopters shooting missiles at 
the institution's name. On the side of the helicopters they'd write FDIC or 

Word of the Kansas City grand jury probe sent a clear message to Franklin 
Winkler and his father, Leslie. As accomplished con artists, they knew when a 
gig was up, and if even the Kansas City feds were onto them, then this gig was 
most certainly up. In early 1987 both Franklin and his father skipped the 

Daily was obviously going to be named a defendant in any case brought by 
the Kansas City Strike Force, and as usual he was quick to take up pen in his 
own defense. This time he described his ideas for subverting Manning's inves- 



tigation. In a report he called "Goals Achievable Through Use of Public Relations 
and Investigati\e Firms," Daily suggested to his cohorts that when Mike Manning 
came to Honolulu they "put a tail" on him. "The purpose would be to gather 
data on him, associate it with his billing, and try to pick up a little fraud up)on 
the Federal Government by the Morrison, Hecker firm, as well as acquiring the 
capability to embarrass or discredit them, if need be " He also suggested they 
tr>' to get a story on CBS's 60 Minuses that would portray Daily and his straw 
borrowers as victims rather than participants in the scheme. 

But things were coming apart much too fast, and soon after Maffeo's search 
of the First United offices. Renda's own right-hand man and executive vice 
president, Joseph DeCarlo, St., began secretly negotiating with Maffeo and the 
Brooklyn Organized Crime Strike Force for immunity in exchange for testifving 
against his boss. When the talking was over DeCarlo agreed to plead guilt\ to 
a single count of conspiracy and another count of tax evasion in return for 
immunity on everithing else. He also agreed to testify against Renda in return 
for a five-year cap on his sentence. 

That was all Maffeo needed. Ten days later, in the early morning hours of 
June 16, 1987, a squad of FBI agents swooped down on Renda's New York 
mansion armed with a 145-count grand iur\' indictment. The federal agents read 
Renda his rights, and in front of his wife and children they handcuffed him and 
led him off to a waiting car. Renda was charged, along with codefendant Martin 
Schwimmer, with defrauding Sheetmetal Workers Local 83 and Teamster's Local 
810 by skimming nearly $16 million off of the $100 million in pension funds 
brokered by First United Fund into thrifts and banks between December 1981 
and December 1984. Renda and Schwimmer were charged with racketeering, 
mail and wire fraud, embezzlement and bribery. Prosecutors said the First United 
Fund case was the largest criminal union-pension fraud scheme ever prosecuted 
by the Justice Department. 

The same day Renda was scooped up in New York — and three years after 
Manning had pleaded with the assistant U.S. attorney in Kansas City to prosecute 
Renda — a 31 -count grand jury indictment was unsealed in Kansas Cit\', charging 
Renda, Franklin Winkler, and Daily (and others) with embezzlement and with 
defrauding Indian Springs State Bank and Coronado Savings and Loan of $7 
million. It was a bad day for Mario Renda. He now had a two-front war to fight. 
Maffeo was prosecuting him in Brooklyn for skimming from the pension funds, 
and the Kansas City Strike Force was prosecuting him for defrauding Indian 
Springs State Bank. 

Renda and his attorney appeared before a federal judge in Brooklyn later 
that day. Renda's attorney objected to his client's rough handling earlier that 
morning by the FBI: "I understand there is little the court can do to help me, 
to raise my strenuous outrage at Mr. Renda's arrest this morning at seven o'clock 
in his home in Garden City in the presence of his children. . . . My client has 

The End of the Line • 121 

asked me to apologize for the manner in which he appears before your honor. 
Having been taken out of his home this morning, he wasn't in a position to 
choose a tie or put on a suit." 

To which a sober-faced judge rephed, "Don't worry, I'm not fussy." 
The Brooklyn indictment charged that Renda and Schwimmcr had obtained 
union business the old-fashioned way, by bribing union officials. It charged that 
once the money was placed at thrifts, First United Fund was paid commissions 
that were shuttled to "off the books" bank accounts and not declared. With their 
profits in accounts not reflected on the books of First United Fund, the indict- 
ment claimed, Renda began lying on his taxes. In 1982 he claimed income of 
$2,251,478 for First United Fund when in fact First United Fund made 
$3,284,370 that year. In 1983 he told a whopper. He claimed First United 
Financial Corporation had made a profit of $137,206, when in fact income that 
year totaled $3,429,546. In all, Maffeo charged, Renda and Schwimmer had 
received over $16 million illegally from the two pension funds. 

October 19, 1987 ("Black Monday" on Wall Street) — three years to the day 
after Maffeo's troops showed up with a search warrant at First United Fund's 
office in Garden City, New York — Renda was to go on trial along with Sam 
Daily in Kansas City. (Franklin Winkler was hiding out in Australia.) Jury 
selection had already begun when Renda and his attorney cut a separate deal 
with the head of the Kansas City Organized Crime Strike Force. Facing one 
count of conspiracy and 29 counts of federal wire fraud, Renda agreed to plead 
guilt)' to two counts of wire fraud for a two-year cap on his sentence. 

Brooklyn Strike Force attorneys were furious with their Kansas City brethren 
because an attorney on the Kansas City Organized Crime Strike Force had 
earlier refused a much better offer from Renda: Before he was indicted Renda 
had offered to plead guilty to both the Brooklyn and Kansas City charges and 
take whatever sentence the judge gave him in Brooklyn in exchange for a max- 
imum sentence of two years in the Kansas City case. He had also offered to 
repay the FDIC and FSLIC $20 million in cash. But the attorney on the Kansas 
City Strike Force refused the deal because he wanted to hold out for a prison 
sentence of five to seven years. By the time the trial rolled around, however, 
the head of the strike force had evidently gotten cold feet, and Stuart Steinberg, 
Renda's friend and attorney, cut a deal. But the offer to repay $20 million was 
off because Renda now claimed to be broke. ^ The FSLIC and the FDIC were 
left standing at the altar with that familiar empty feeling in the pits of their 

"Steinberg told me he couldn't believe how good a deal they were offered," 
an attorney close to the case told us. "He .said they didn't even require Renda 
to testify against Daily or the others in the case. " 


The Kansas Cih' acceptance of the Rcnda plea bargain particularly angered 
the Brooklyn Strike Force attorneys because they had gotten Renda's subordinate, 
Joe DeCarlo, to agree to testify against Renda in return for a /ive-year-sentence 
cap. How did it look when the main culprit made a better plea bargain than his 

The Kansas City Strike Force had let Mario Renda, one of the key figures 
in a nationwide scheme to defraud thrifts and banks, off with a two-year slap 
on the wrist. We had to wonder. Didn't the Justice Department know what kind 
of damage Renda had done at dozens of institutions? Weren't they aware by 
now of his associations with others who had swindled thrifts and banks across 
the country? (At least one member of the Kansas City prosecuting team certainly 
understood the significance of the case when he warned an investigator ominously 
after the trial, "This is much bigger than even you know. These are very nasty 
people.") Still, the Renda case had, from a prosecutor's standpoint, been 
"turned." For the record, the Kansas City Organized Crime Strike Force had 
its "conviction." 

With Renda now out of the case and Franklin Winkler on the lam in 
Australia, that left just Daily and another minor player, Los Angeles in\estor 
and syndicator Fred Figge, to face 28 counts of wire fraud and one count of 
conspiracy.'' The case droned on for two months. The loss of its star defendant, 
Renda, a key element in the original indictment, took all the focus out of the 
case. It bogged down badly as prosecutors tried to replace Renda with technical 
particulars. They threw over 670,000 pages of documents at the jury. The papers 
filled a dozen file cabinets and would have stood ten feet thick. When the trial 
ended in December 1987 the jury issued a muddied decision, finding Daily and 
Figge innocent of all the wire fraud charges but guilty of conspiracy. 

The defense had contended that DaiK and Figge were \ictimized by the 
Winklers, who then fled and left Daily and Figge holding the bag. After the 
trial some jurors said they agreed. But a defense attorney told a Kansas City 
Times reporter he wasn't sure the jury understood what they were doing, since 
they convicted the two men for conspiracy, which embraced the wire fraud 
counts, but did not convict them of the wire fraud. 

"It's quite possible the jury was confused." he said. "I don't know whether 
they really knew what was going on or not." 

Renda was not going to get off so easily in Brooklyn. Maffeo had ail the 
evidence he needed tying Renda to the pension-fund embezzlement scam. And 
now, with DeCarlo telling all to federal prosecutors, Renda knew he was trapped. 
So he decided to follow DeCarlo's lead and turn against Schwimmer. Renda 
told Maffeo that he would testify against Schwimmer in return for consideration 
on his sentencing in the Brooklyn case and help with the judge on the Kansas 
City case, for which he had not yet been sentenced. Maffeo agreed. Renda 
pleaded guilty to racketeering and tax-evasion charges. In return Maffeo agreed 

The End of the Line -123 

to recommend to the Brooklyn judge that he hniit Rcnda's jail sentence to 25 
years and agreed to send notice to the Kansas City judge that Renda was now 
cooperating with federal prosecutors. ^ 

After Maffeo settled matters with Renda, a source close to the case who knew 
we were investigating Renda sent us a package. Four years' worth of Mario's 
personal desk diaries arrived in a large UPS box one morning. Maybe in looking 
them over we'd see some familiar names, she said on a small yellow note attached 
to the first page of the foot-high stack. 

The package included Renda's daily business diaries from January 2, 1981, 
through October 19, 1984 (when Maffeo's forces stormed P'irst United Fund 
with a search warrant). Renda apparently kept the diaries on his desk and jotted 
down notes on important phone calls, reminders to himself, daily interest-rate 
quotes, and just plain trivia. The diaries were peppered with dozens of names 
we already knew. 

Khashoggi was there. The Dunes Hotel and Casino. Winkler. Daily. Le- 
master. Seaside. Teamsters. Ferrante and the Palace Hotel in Puerto Rico. 
Steelworkers. San Marino S&'L. Bank of Irvine. Consolidated S&L., Bill Pat- 
terson of Penn Square Bank, First Atlantic Investment Corporation, Bureau of 
Indian Affairs, California Congressman Tony Coelho, all dutifully noted in 
Renda's own scrawl. Also, Morris Shenker was there: "Bill Wiss friend of Morris 
Shanker [sic]. " "Morty Shanker deal. " "B of A on Shanker deal." It took us days 
to pick through the diaries, trying to decipher Renda's careless handwriting and 
impossible spelling. 

The scope of Renda's activities seemed to grow with every new piece of 
information. Given the allegations that Sal Piga was a Lucchese mob family 
associate and that the Brooklyn Strike Force had recorded an alleged Lucchese 
mob family member talking about how Schwimmer was helping him launder 
money through bearer bonds, we kept wondering if the mob was pulling Mario's 
strings. We asked several investigators if Renda was working with or for the mob, 
and one day we received a piece of unmarked mail. We opened the large envelope 
and found inside the sworn deposition of Lawrence S. lorizzo. Attached was a 
handwritten note to us: "If you are focusing on mob bust-outs of savings and 
loans, then this is the definitive piece." 

There were no shades of gray there, no subtleties to wade through. Larry 
lorizzo was a bona fide hood. He was about five foot ten and weighed 300 
pxjunds. He had been convicted of bootlegging gasoline on Long Island and he 
had fled to Panama, where he was silly enough to cross swords with Colombian 
drug lords. Rather than kill lorizzo, the drug lords simply put him on a nonstop 
flight from Panama to Miami. As soon as the plane was airborne, they called 
the U.S. attorney in Miami and said, "Guess who's coming to dinner." 


lorizzo had decided at that point to save his skin by talking, and the feds 
placed him in the federal witness protection program. In return for protection 
he agreed to give evidence whenever he had information about a case. In a 
sworn deposition, September 30, 1987, lorizzo told the feds what he knew about 
Renda. He said: 

Back in 1981, when Renda and the Winklers were first formulating their 
linked-financing scheme, lorizzo was the president and principal shareholder of 
a mob-front company called Vantage Petroleum Company in Bohemia, New 
York. He had been indicted in Suffolk County, New York, for obtaining contracts 
to distribute gasoline to turnpike and highway markets by collusive bidding. The 
case had been widely reported in the press and no one would loan either Vantage 
or lorizzo any money. 

This blacklisting was creating cash-flow problems for lorizzo, and a friend 
steered him to Leslie Winkler. Leslie told lorizzo that his friend Mario Renda 
was a New York "money man" who could help lorizzo with his cash-flow 
problems. Leslie arranged a meeting between Renda and lorizzo in late 1981. 
lorizzo testified: 

During that meeting, held at Renda's home, I explained my financial dif- 
ficulties to Mario Renda. Renda told me that he was aware of the cash-flow 
problems and had been briefed on the situation by Winkler. Renda also 
indicated that he had read about my problems with law-enforcement au- 
thorities in the newspapers. 

Renda explained to lorizzo how his linked-financing scheme worked: 

I understood from our conversation that brokered CDs could be used 
with banks that wanted to inflate their cash position, making the banks more 
liquid and in a more favorable position to extend loans. Renda told me that 
he could arrange for deposits to be put into a bank, if there was a bank that 
1 knew well enough to talk to and explain that I could arrange for money 
to be deposited if the bank would give me a loan. 

Leslie Winkler told lorizzo that Renda was very close to Adnan Khashoggi 
and that Renda might be able to assist lorizzo in getting a fat oil contract if 
lorizzo used his powers of "persuasion" in New York to help Khashoggi. It 
seemed Khashoggi, who owned a home outside New York City, was having 
trouble getting the town fathers' approval for a helicopter landing pad at his 
home. Renda said that if lorizzo could "remove these obstacles," Khashoggi 
would be most appreciative. 

At that same meeting, lorizzo later swore, he and Renda exchanged their 
Mafia bona fides, with Leslie Winkler telling Renda that lorizzo was with the 

The End of the Line • 1 25 

Colombo crime family and Rciida in turn bragging that he eontrollcd "a lot of 
money being loaned for the benefit of the Paul Castellano family." Castellano 
was the New York City Mafia boss for the Cambino crime family. 

According to lorizzo, he and Renda came to an agreement under which 
Rcnda would place money at a bank of lorizzo's choice, and he chose Central 
National Bank of New York (CNBY). I'he bank then made loans to a Pana- 
manian shell corporation formed by lorizzo. Renda got $35,000 under the table 
from lorizzo as his share in the CNBY scheme and Leslie Winkler got a small 
percentage for making the introductions. 

"I literally purchased the company's papers from a lawyer in Panama who 
maintained them, along with other such entities, on the shelf of a bookcase in 
his office in Panama," lorizzo said. He had been introduced to the Panamanian 
lawyer by Leslie Winkler. lorizzo told Renda he used the Panamanian shell 
corporation rather than Vantage Petroleum for this loan "because I had no 
intention of paying the loan off once it was made. Renda then suggested that I 
could use Panamanian shelf companies such as Houston Holding in order to 
borrow money from other banks in the United States and/or Europe, allow the 
loans to go into default, and then collapse these companies into bankruptcy, 
thereby discharging the nonperforming loans." What lorizzo described was an- 
other classic bust-out. 

Renda and Leslie Winkler also tried to enlist lorizzo into their overall scheme 
to bust out banks and thrifts. "I understood from these discussions that the 
schemes involved getting banks to take in brokered deposits to make loans to 
limited partners who would turn the proceeds over to general partners in a 
partnership arrangement. . . . There was no intention of repaying anybody as 
the general partners had no obligation to pay the loans off . . . the loans would 
go into default and as the collateral was not worth as much as it was represented 
to be, the limited partners would be left with the responsibility of paying on the 
mortgage and/or promissory notes." Though interested in the scheme, lorizzo 
had declined "due to other activities which required my presence in New York." 

Renda's diaries and lorizzo's deposition fleshed out for us Renda's role as a 
deposit broker. Taken together with the activities of his partner Schwimmer with 
the Lucchese crime family, they left little room for doubt that Renda's banking 
activities were intertwined with the mob's. Taken in a larger context, they were 
even more significant. Renda was a fellow who, in a matter of a few short years, 
went from tap-dance teacher to multibillion-dollar deposit broker and who was 
able to bilk dozens of thrifts and banks out of tens of millions of dollars. Ulti- 
mately, he put many of these institutions out of business — all of which he did 
with other people's money and newly promulgated government regulations that 
deregulated interest rates and thrift rules. The warnings issued by Ed Gray and 

126 • INSIDE |OB 

a handful of others went unheeded as Congress Hstened instead to thrift lobbyists 
who insisted that brokered deposits were not a problem. When the court ruled 
that only Congress, not the FHLBB, could limit FSLIC insurance on brokered 
deposits, all hope of bringing the "hot money under control vanished. The 
next step the FHLBB might have taken would have been to assign more examiners 
to watch institutions using large amounts of brokered deposits, but the FHLBB 
did not have enough examiners to do the job. 

In the vacuum created by regulatory and congressional inaction, Mario 
Renda and others like him moved in and quickly subverted the role of deposit 
broker to that of extortionist and corruptor. Finding small thrifts struggling to 
make it against larger competitors, these brokers put a price on their millions 
— a cut. With the promise of huge deposits as the carrot, heretofore honest thrift 
officials agreed to accommodate the deposit brokers and their friends, who then 
spirited off their share of those deposits, never to be seen again. What did it 
matter? they reasoned. The deposits were insured — backed by the "full faith and 
credit of the U.S. Treasury." 

The laws and regulations covering brokered deposits have not changed as of 
this writing. The potential for abuse by unethical deposit brokers like Mario 
Renda remains. We had hoped that the downfall of Mario Renda would have 
alerted regulators and examiners, but it was not so. In late 1988 — three and a 
half years after the collapse of Indian Springs State Bank — when we interviewed 
the senior trial attorney at the FHLBB, we sat in shocked disbelief when we 
learned that he had no idea who Renda was or what Renda had done. 



The Mafia of the 1980s was a sophisticated $50 bilhon enterprise that employed 
financial consultants and attorneys and dealt on a daily basis with international 
currency fluctuations and the rise and fall of the Tokyo stock exchange. ' Indi- 
vidual Mafia members had average annual incomes of over $200,000. The top 
50 bosses made much more.- They traveled in the world of high finance, and 
even before thrifts were deregulated, upper-echelon Mafia financiers knew exactly 
how they would benefit from deregulation. They were ready to take advantage 
of the opportunity as soon as Congress passed the legislation. The lower echelons 
of the modern Mafia, a vast and assorted crew of "wise guys"' who were constantly 
sweeping the country for lucrative scams, also quickly got the word that savings 
and loans had changed. The Mafia on all levels struggled daily with a consuming 
need for cash and for a way to launder it. Thrift deregulation fulfilled both of 
those needs nicely, making it easier to launder money through multimillion- 
dollar development projects, using a thrift as a front, and making it easier to 
find thrift executives willing to make risky loans for a piece of the action. Not 
only had the rules been drastically eased, but the cops (thrift examiners) were 
no longer much of a threat, their ranks having been gutted after state and federal 

In our investigation we ran into the mob, or associates of the mob, at 
many of the thrifts we examined. Each of the "Big Five" New York fam- 
ilies — Gambino, Genevese, Lucchese, Bonanno, and Golombo — turned 
up, along with the lesser families such as the Civellas from Kansas Gity, 
Garlos Marcello in New Orleans, Santo Trafficante in Tampa, and oth- 
ers. Did the leadership of crime families have a sit-down^ one day and 
decide to loot S&Ls? Glues that surfaced at dozens of savings and loans 
convinced us that some form of coordinated operation existed. The evi- 
dence was overwhelming that the Mafia was actively looting S&Ls — in 



various, widely disparate locations, at the same time, in tlic same ways, often 
using the same people. 

The mob was also using S&'l^ to launder money. Thrifts' access to brokered 
deposits, as well as their new ability to make direct investments in real estate 
projects and partnerships, made deregulated thrifts a natural vehicle for laun- 
dering large sums of money. Among the most popular money laundering tech- 
niques were:' 

Buy an asset (a piece of property or a business, for example) with a loan 
from a thrift. Repay the loan over a period of time with dirty money. 
Once the loan was paid off, sell the asset and the money was laundered. 
(Or default on the loan and let the thrift repossess the property. Either 
way, you had an explanation for the origin of the money if anyone 
should ask.) 

A twist that would allow you to both launder money and steal some 
from the thrift at the same time was to borrow more on the asset than 
you paid for it (and more than it was worth) and then default on the 
loan, claiming you lost money on the project. The money in your 
possession would then clearly be the product of the defaulted loan and, 
therefore, laundered. Plus, you'd have the extra money you had made 
by overencumbering the asset (which the thrift would repossess and have 
to dispose oO- 

The permutations and possibilities were endless, especially when done in 
conjunction with a real estate transaction. The American way of handling real 
estate transactions was cluttered with 200-year-old ownership instruments like 
quit claim deeds, grant deeds, trust deeds, and deeds of reconveyance. Those 
arcane instruments might cross the sights of average people only once in their 
lives, when they bought their own homes. But to the white-collar swindler and 
money launderer, they were the tools of the trade. A routine heist or money- 
laundering operation involving real estate was a blizzard of such instruments, 
hiding true intentions behind a frenzy of deeds and note filings.'' 

Thrift deregulation came at a time (the early 1980s) when federal strike forces 
had targeted what they believed to be $100 billion' being laundered through 
U.S. financial institutions every year. The Bank Secrecy Act, passed in 1970, 
had several important provisions that fought against money laundering, including 
requiring banks and thrifts'* to report all transactions over $10,000. But working 
against the Bank Secrecy Act was the 1978 Right to Financial Privacy Act (and 
many state laws), which severely limited what banks could tell law-enforcement 

The role of savings and loans in money laundering made headlines in 1985 

"Miguel" • 129 

when results were made public of Operation Greenback, a federal money-laun- 
dering probe conducted in Puerto Rico from 198? to 1985. 'I'wo senior FHLBB 
officials admitted they had altered bank examination reports that would have 
exposed possible currency reporting violations at a Puerto Rican thrift. The 
president of the Puerto Rican thrift was also vice chairman of the FHLB of New 
York. Senator William V. Roth (R-Del.), chairman of the Senate Committee 
on Governmental Affairs' subcommittee on investigations, said in hearings in 
July 1985: 

It is instructive to note that in 1983 the FHLBB examined 2,185 savings 
and loans nationwide, including Puerto Rico, and found two Bank Secrecy 
violations (primarily failure to report cash transactions over $10,000), 
whereas in the same year the FDIC found ten of the eleven Puerto Rican 
banks examined to be in some form of noncompliance with the Act. In 1984 
the Bank Board found zero violations out of 1,906 examinations nationwide. 
In Puerto Rico alone the FDIC found six of the seven banks examined in 
noncompliance. Now this either means that the savings and loans are models 
of compliance with the Act, or that the Board just is not doing its job. There 
is little question in our minds that the latter is the case: The FHLBB has 
consistently dropped the ball regarding enforcement of the Bank Secrecy 
Act. In the entire history of the Act, since its passage in 1970, the Board 
has referred a grand total of two financial institutions to the Treasury De- 
partment for civil penalties, none for criminal penalties. 

That complacent environment was nirvana for the mob, and they took 
ever\' advantage of the opportunity. But the most prevalent mob activity we 
found at thrifts was individual mob members and associates getting and de- 
faulting on loans — big loans and lots of them. The mob's survival depended 
on a constant flow of money. Before deregulation getting that money was a 
hit-or-miss proposition. Wise guys often had to shake down small businessmen. 
It was hard work. After deregulation thrifts bursting at the seams with brokered 
deposits were like the mother lode and the wise guys were the '49ers. If wise 
guys could get sufficient control of a thrift, they busted it out. If they failed 
to gain control, they took what loans they could get and moved on to the next 

The frenetic pace with which they scoured the thrift industry looking for 
loans seemed also to be a function of the way the mob had changed since the 
1960s. Twenty years ago the mob was still a fairly homogeneous entity made 
up of well-recognized "families" who controlled precisely described territories 
and took care of their own. Like Fortune 500 companies, mob families had 
their own now-familiar hierarchy, with each station bearing its own, sometimes 
paramilitary, title like capo, lieutenant, soldier, earner, wise guy. But the 1980s 
mob had undergone its own version of perestroika."' To survive a war on the 


mob tliat was being waged by lav\ enforcement armed with high technology' 
tools, wise guys were given far more independence of action. No longer were 
they required to get the Godfather's support for every little operation or scam." 
Instead, mob operatives used their family associations (and one person might 
have several) as a reservoir of talent and influence when conducting an operation. 
Also, the young wise guys were far more independent-minded than in the old 
days when they virtually worshiped the Godfather. The conviction of 1,000 
Mafia bosses and underlings since 1981 created a \acuum into which young, 
reckless, independent operators moved (to the dismay, apparently, of older Mafia 
members). They tended to organize their own jobs. "Our Thing has turned into 
My Thing," testified a former FBI agent.'- When the job was done and the 
money in hand, the wise guys' only responsibility was "to do the right thing," 
meaning to be sure they passed enough of the booty up the line of command 
to satisfy the family. 

In the past the Mafia had had little interest in a conservative thrift industry 
that only made home loans. But the deregulated thrift industry was an exciting 
new target for wise guys with busy minds always figuring out their next scam. 
Throughout our research, then, when we talked to regulators or FBI agents, we 
always asked them, "Are you coming across any mob-related people in your 
thrift investigations?" Coauthor Paul Muolo, headquartered in New York and 
living in New Jersey, got the tip that led us to the mob-related operation we 
later decided was most typical of such activity at a thrift. His New York source 
had told him: 

"Well, check out Flushing Federal Savings and Lx)an over in Queens. Drop 
the name Rapp and see what happens. By the way, his real name's not Rapp, 
it's Hellerman. Michael Hellerman." 

In late 1972, Michael Hellerman and his wife, Mar\', a tall slender woman 
in her late twenties, had exited their car off the Cross Island Parkway and pulled 
into the driveway of their home in Bayside, Queens." A stockbroker in his mid- 
thirties, Mike Hellerman had chosen to settle in this upper-middle-class enclave 
because of its relative proximity to New York City. Bayside was close enough 
that Hellerman could enjoy the city's nightlife while staying in touch with his 
clients, but far enough removed so he could escape the hustle and bustle. A 
suburb speckled with well-groomed single-family homes and small garden apart- 
ments, Bayside was a perfect place for Michael Hellerman to blend in with other 
professionals commuting daily to New York. It was also a perfect place for 
Hellerman to hide from his stock clients, who, perhaps, weren't prospering from 
some of Mike's recent trades. 

Hellerman and his wife, returning from dinner, pulled their Cadillac into 

"Miguel" ■ 131 

the driveway and climbed out. Vout police officers came over to the couple as 
a crowd of curious neighbors watched. 

"You Mike Hellerman?" a sergeant asked. 


The police led Hellerman and his wife to the house. "It looks like someone 
shot up your house, Mr. Hellerman," one officer told him. The Hellermans' 
home had been machine-gunned. 

Only a few days earlier the couple had been held up at gunpoint in their 

That night Hellerman's wife, Mary, became hysterical. The couple packed 
up their belongings and children and, using phony names, checked into the 
Diplomat Hotel across the river in midtown Manhattan. To neighbors and the 
police the event seemed out of place in the quiet neighborhood. But Mike 
Hellerman knew exactly what had happened and why. He also knew he needed 

On October 19, 1972, two days after the shooting, he called a contact he 
had at the Federal Bureau of Investigation and baited his hook. He would be 
willing to tell the F"BI everything he knew about the mob's activity on Wall 
Street, he said, if he could be guaranteed protection. He assured them he had 
plenty to tell and that members of the organized crime families he'd been dealing 
with wanted Mike Hellerman dead. 

As his neighbors in Bayside would later learn, Mike Hellerman wasn't just 
any stockbroker. He was the mob's stockbroker. And he had enough information 
on mob stock scams to send key members of the Lucchese, Colombo, and 
Gambino crime families to prison for years. But it wouldn't be easy for Mike. 
One of Hellerman's best friends was John Dioguardi, better known as Johnny 
Dio, a big labor union racketeer who was reportedly a member of the Lucchese 
crime family. Dioguardi had once been instrumental in helping Jimmy Hoffa 
become president of the Teamsters Union. Dio and Hellerman were tight — so 
tight in fact that Dio was Hellerman's "protector" in the mob. From the late 
1960s, up until he was sent to prison in October 1972 for bankruptcy fraud, 
Dio made sure that no harm came to Mike as Hellerman pulled stock swindle 
after stock swindle for the families. 

Over the years Hellerman's stock scams had netted millions for Dio and 
mobsters like Vinnie Aloi, reputed to be the head of the Colombo crime family. 
There seemed no limit to the ways Mike Hellerman could turn a buck on a 
stock swindle. Hellerman bribed traders, artificially inflated the price of stocks 
by setting up phony buyers, and sold artificially inflated stocks at unheard-of 
profits. Other times Hellerman formed companies that had little or no assets, 
sold thousands of dollars' worth of stock in them, pocketed the profits, and left 
the buyers holding an empty bag when the bottom fell out of the stock price. 


It seemed that no matter how many people he burned, Hellerman rarely got 
burned himself. Sometimes he sold stolen bonds. In other scams, using a phony 
company he'd created, he'd get a loan from a bank using stolen bonds as col- 
lateral. And in every scam the mob was there, riding a crest of stock 
scams engineered by their Wall Street wizard Michael Hellerman, who later 
referred to himself in his autobiography as a nice Jewish boy gone wrong. 

From the mid-l%Os up until late 1972, Hellerman had inhabited an un- 
derworld ruled by men like Dio and Vinnie. And he had no regrets. Along the 
way he had met a lot of people and seen a host of things that he would never 
have seen if he'd taken his father's advice and become an accountant. '^ Heller- 
man not only had helped the mob swindle millions but he had been involved 
in two major political scandals as well, including a brush with Watergate. He 
described the scandals in his 1977 biography. Wall Street Swindler. 

In 1969 two aides to then House Speaker John W. McCormack had been 
convicted of attempting to peddle their influence with the SEC on behalf of a 
Hellerman company. And then in November 1971 Hellerman was implicated 
in a Watergate-related case, although he never was indicted. Robert Carson, an 
administrative aide to Hawaii Senator Hiram Fong (Carson had been president 
of the Honolulu Stock Exchange and also chairman of the Hawaiian Republican 
Party for eight years before he became Fong's aide), tried to quash the Justice 
Department indictment of Hellerman, Dio, and others in return for a $200,000 
bribe. Richard G. Kleindienst, then deputy attorney general during the Nixon 
administration (Kleindienst later became attorney general), testified that Carson 
had offered to donate $100,000 of the money to the Committee to Re-Elect the 
President (CREEP) if Kleindienst killed the indictments against Hellerman and 
the other organized crime figures, including Vincent Aloi, Johnny Dioguardi, 
and Carmine Tramunti, reportedly head of the Lucchese family. Carson was 
eventually indicted and convicted. 

Whatever else one might say about Hellerman's life, it had not been boring. 

The son of a Polish immigrant, Hellerman grew up in Brooklyn and Long 
Island. When he finished college he headed straight for Wall Street. He was an 
imposing figure, over six feet tall and 200 pounds. He also was a quick study, 
with an uncanny ability with numbers, and he prospered almost from the start. 
His philosophy, he would later say in Wall Street Swindler, was simple. 

"One of the first things I learned was that the investor, the buyer of stocks, 
is a sucker. He's just a turkey waiting to be plucked. He is totally at the mercy 
of his broker, who can manipulate him in such a way that the broker can 
wind up making more money than the customer and use the customer's money 
to do it." 

By the time Hellerman was 22 the newspapers were referring to him as the 

"Miguel" ■ 133 

"Wizard of Wall Street." The more Hellerman made, the more lie spent, and 
the money went quickly. Caught up in the glamour of Wall Street in the early 
1960.S, Hellerman always wanted more and his need for money became an 
addiction. Soon Hellerman was bribing stock clerks and taking his customers 
(and even his fellow brokers) for a ride. But some of Hellerman's honest customers 
complained and word got back to the Securities and Exchange Commission. At 
the age of 24 he was barred from engaging in the securities business in New 
York state. 

By 1963 Hellerman, who'd developed a fierce gambling habit, was hanging 
out in Las Vegas, a down-and-out compulsive gambler. Cheating on Wall Street, 
Mike Hellerman was often a winner. But at the gaming tables, particularly the 
craps tables in Vegas, he was in way over his head. Following a drunken binge 
one night, Hellerman woke up thinking he'd won $15,000 only to discover that 
he'd dropped $240,000 at craps the night before. 

In Wall Street Swindler. Hellerman said that in Vegas he fell in with the 
mob. He gravitated to Moe Dalitz, an old bootlegger and an alleged member 
of one of Cleveland's organized crime families. Dalitz wanted to hire Hellerman 
to work at his Vegas Desert Inn Hotel and Casino. Dalitz and Hellerman also 
cooked up a plan to open a hotel and casino in Reno. The deal flopped when 
Hellerman couldn't come up with a gambling license. It seemed that, like the 
SEC, the gaming control authorities in Las Vegas had certain standards that 
Mike didn't meet. 

During his Las Vegas days in the mid-1960s Hellerman made friends with 
mobsters like Johnny Roselli, who was a one-time member of Al Capone's gang 
and the right-hand man of Sam Giancana, Chicago's Mafia boss.'^ But Heller- 
man's gambling problems — as well as his as,sociation with underworld crime 
figures — escalated, and it was only through the efforts of a special friend, Hel- 
lerman would later recall, that he was able to escape Vegas, at least for the time 
being, and return to New York, where Hellerman hoped to put his life, and 
scams, back together. 

That special friend, Hellerman's savior, was Jilly Rizzo, who was almost 20 
years older than Mike. Stocky Jilly Rizzo has often been described as Frank 
Sinatra's right-hand man, valet, personal body guard, and best friend. Rizzo 
and Hellerman became fast friends in spite of the fact that they appeared to have 
very little in common. Whereas Hellerman was a smooth talker, Rizzo was gruff 
and unrefined, which he made up for by being outgoing and gregarious. But 
Rizzo, despite his rough exterior, had a knack for making people, especially his 
restaurant customers, feel at home. He had slick, greased-back dark hair and he 
was starting to bald. As Hellerman said in his biography, "Jilly wasn't a handsome 
man." But Hellerman added, "If Jilly had a mission in life, it was to please 
Frank Sinatra." 

Former mob enforcer turned informant Jimmy "the Weasel" Fratianno re- 


called, in his biography, a call he got from Rizzo that seemed to illustrate Rizzo's 
relationship with Sinatra. Fratianno said Rizzo told him: 

"Jimmy, Frank has asked me to speak to you about a jerk that used to work 
for him as a security guy. A real fucking animal. Hit a guy in the jaw and 
collarbone with one punch. . . . Frank fired him and the guy's had a hard- 
on for Frank ever since. He's been spouting off some bullshit to the scandal 
sheets. ... we want this guy stopped once and for all. Know what I mean?" 

"You want the guy clipf>ed? Just say the word and the motherfucker's good 
as buried." 

"No," Rizzo said. "Not right now. Just hurt this guy real bad. Break his 
legs, put the cocksucker in the hospital. Work him over real good and let's 
see if he gets the message "'^ 

Hellerman had first met Rizzo when Rizzo was running Jiily's Restaurant, 
a popular New York nightspot that drew both entertainers and members of New 
York's well-known organized crime families. Jilly mingled w ith both — with equal 
success. Over the next 20 years Jilly and Mike would remain friends and Mike 
would make the bulky, tough-looking Rizzo an integral part of his life. 

In 1963 Rizzo and Hellerman opened a restaurant together in New York 
called Mr. J's, named appropriately for Rizzo. The new Rizzo-Hellennan res- 
taurant was a smashing success, at least at first, and Hellerman made even more 
contacts with men who made their living as part of the underworld. Hellerman 
later said he also met and became somewhat friendly with Rizzo's friend Frank 
Sinatra. And the Hellerman charm didn't fail him. Soon Sinatra was affection- 
ately referring to Mike Hellerman as "Miguel." Mike, still in his early twenties, 
even proposed a joint-venture casino deal with "Old Blue Eyes." The deal never 
came off, but Sinatra reportedly liked the kid's pluck. 

By 1968 Hellerman knew he wasn't going to get rich running a restaurant, 
and he decided to try to get back on Wall Street, where the money was. The 
SEC had barred him from the securities industry because of his earlier stock 
swindles, but that wasn't really a problem. To keep his name out of the deal, 
Hellerman set up a firm in the name of an old college chum who knew absolutely 
nothing about the brokerage business, and he hired a stable of brokers through 
whom he could move stocks. 

During his earlier fling on Wall Street, Hellerman's mistake had been in 
trving to do his kind of business with the general public. They had taken umbrage 
and had turned him in to the SEC. Hellerman would have no such finicky 
customers this time around. Instead, he recruited customers like Johnny Dio 
and Vinnie Aloi. From 1968 to 1972 Hellerman pulled one stock swindle after 
another. On some of the deals he even swindled lower-level mobsters. Some 

"Miguel" • 135 

complained to Aloi about tlie deals, but no harm ever came to Hellerman because 
Dio had become liis "■protector." For a piece of the action Dio would make sure 
no harm came Mike Hellerman's way. Besides, the two men had actually become 
ver)' close friends. 

Hellerman was raking in the money once again. And his old spending habits 
came back, too, just like it was yesterday. He was spending $10,000 a week in 
pocket change — jewelry, furs, expensive furniture and restaurants. Life was in- 
deed blessed for Michael Hellerman. But again the good times were not to last. 
hi October 1972 Dio was headed to prison for bankruptcy fraud. The night 
before Dio surrendered to U.S. marshals he and Hellerman got together at Dio's 
house in Bayside for a final farewell with friends. Hellerman was worried that 
with his protector in prison and with the SEC and FBI eycbaliing his operation, 
his life was in danger. 

"What's bothering you, Mike?" Dio asked Hellerman in private. "We knew 
this would happen sooner or later." 

"I know," Hellerman replied. "But I'm scared. I'm going to move the hell 
out of New York as fast as I can. There are a lot of guys waiting for me now 
because you're going to be gone. " 

Hellerman was right. The mobsters he'd been swindling had a feeling that 
federal investigators from the SEC and the U.S. attorney's office in Manhattan 
were moving in for the kill. They were mad at Hellerman, not only for some 
of the unfavorable deals he'd cut for them, but also because, to save his own 
skin, Hellerman might be willing to sell out his old friends, including Dio, Aloi, 
and even Carmine Tramunti. There was plenty of sentiment within the families 
that they had better get to Hellerman before Hellerman got to them. They 
machine-gunned his house to warn him to keep quiet. 

But the warning had the opposite effect. Hellerman quickly decided to cut 
a deal with New York Assistant U.S. Attorney Robert Morvillo, an old high 
school football buddy. Morvillo was now on the other side of the law, as head 
of the criminal division for the Southern District of New York. '"" The deal was 
this: Hellerman would get at least six years in prison for three large stock swindles 
that he masterminded, and he would testify against Tramunti, Aloi, and even 
his good friend Johnny Dio. Hellerman agreed. And in time all three would be 
sentenced to lengthy prison sentences because of Hellerman's testimony. 

In the fall of 1973 Hellerman went from trial to trial as a protected govern- 
ment witness, testifying against Carmine Tramunti, Vinnie Aloi, and finally 
johnny Dio. But by this time Michael Hellerman, a confessed and convicted 
felon himself, no longer existed. Under the wing of the federal witness protection 
program, Michael Hellerman had been transformed into Michael Rapp. As far 
as he and the U.S. government were concerned, Mike Hellerman was history, 
just a sealed file buried in the voluminous records of Foley Square in lower 
Manhattan. His new identity was created for him by the U.S. Marshal's Service. 


With tongue in cheek, they gave him the name "Rapp." New Social Securit\ 
cards were issued, a new birth certificate, driver's license, school records, personal 
histor>', everything short of a new bar mitzvah. (From this point forward we refer 
to Michael Hellerman as Michael Rapp.) 

Mike Rapp also did a little time in prison, a situation he abhorred. When 
he was temporarily released in late 197? to testify against Dio, he swore he'd 
"never commit another crime in my life." He begged Mor\illo and the U.S. 
attorney's office not to send him back to prison. After the Dio trial Rapp went 
to a federal safe house in New England until he was scheduled to testify again 
in another trial involving Dio. To ingratiate himself with his captors, Rapp 
cooperated to the hilt. Rapp had no stomach for being a courageous prisoner of 
war. He sang like a canary. He was responsible for the indictment or conviction 
of more than 90 men. 

What happened to Rapp after he finished testifying on the government's 
behalf is not clear. His life was in danger, and his best bet was to dissolve into 
his new identit)'. What is known is that he did \ery little prison time for the 
stock swindles he masterminded. Since he had testified against members of the 
mob, the U.S. attorney's office believed Rapp wouldn't dare step out of line. 

By 1977 Rapp was living a quiet, simple life in Massachusetts, according to 
law-enforcement officials. Divorced from Mary, he remarried, opened a restau- 
rant in Boston, and tried to settle down. With Thomas C. Renner, a repxirter 
for the Long Island-based daily Newsday, he penned Wall Street Swindler, an 
autobiographical account of how a nice Jewish kid from Brooklyn got greedy, 
befriended mobsters, and pulled an untold number of stock scams on their behalf. 
(Ironically, some of Rapp's methods outlined in his book would later be used 
by convicted inside trader Ivan Boesky.) Nowhere in the book did Rapp disclose 
where he lived or what exactly he was up to. He wrote, "My future, whate\er 
it may be, will depend on what I am willing to contribute. I have the tools, the 
education, and the mind to make a better life and I'm trying harder now than 
ever before in my life." 

He also wrote, "I knew that no matter what the temptation, I would never 
commit another crime in my life. Those three short days, a flickering moment 
in my sentence, were enough to convince me that all the money, all the mink 
coats, jewels, fancy cars, and restaurants weren't worth one day in that prison 

High-sounding promises aside, Rapp soon abandoned the straight and narrow 
path he had set for himself After a run-in with Massachusetts re\enuc agents 
over the possibility that perhaps his Boston restaurant was underpaying its fair 
share of taxes, Rapp left in a huff and moved to Bar Harbor Island in Florida, 
just north of Miami, where in 1983 he resumed his relationship with Rizzo and 
made a host of new friends. He had to. He'd sent all his old friends up the river. 
No matter, his new friends were eager to do business with him. Soon, law- 

"Miguel" • 137 

enforcement officials said, Rizzo introduced Rapp to Anthony Delvecchio, "* a 
tall hulk of a man who weighed in at about 240 pounds and used to work as a 
bouncer in one of Rizzo's restaurants. Delvccchio, in his late forties, grew up 
on Delancy Street, a tough Italian neighborhood in New York's Little Italy. He 
later testified that Rizzo introduced him to Rapp in a Miami restaurant called 
Apples, which Rapp and reputed mobster Phil "Cigars" Moscotta had recently 

Moscotta (who also went by the name Brother Moscotta), Rizzo, Delvecchio, 
and Rapp had dinner at Apples in May 1984 and one topic of conversation, 
Delvecchio later recalled, was Flushing Federal Savings and Loan in Flushing, 
Queens, New York. Rizzo and Delvecchio told Rapp that World Wide Ventures 
Corporation, in which Rizzo and Delvecchio said they held a stake, had just 
obtained an easy $500,000 loan from Flushing secured by some land in the 
Pennsylvania Poconos.'" Delvecchio and Rizzo said World Wide had supplied 
Flushing Federal with an appraisal report that said the land, a hundred acres, 
was worth $2 million. The value was based on the fact that some day World 
Wide Ventures planned to build a hotel, timeshare and sports complex on the 
site. In fact, the land was worth only about $500,000 at the most, maybe less, 
thrift executives said later, yet the president of Flushing Federal had approved 
the $500,000 loan.-" World Wide was a holding company in Orange, New 
Jersey, that invested in other business. It didn't matter that some of the businesses 
never got off the ground — like World Wide's self-chilling soda can.-' 

When Rapp was told the Flushing Federal story over dinner, he must have 
been intrigued. It sounded like his kind of bank. And it wasn't too far from 
Bayside, where he'd almost been murdered 12 years earlier. Rapp listened care- 
fully. He also told Delvecchio he had access to European funds through a 
company called Swiss International, which was controlled by a man named 
Heinrich Rupp. 

"If you need some money for the project in the Poconos, maybe I can help," 
Rapp said, according to Delvecchio. "I have a friend who's close with Rupp." 

Rupp did become involved in another deal that they had on the table that 
night, a deal that involved the Aurora Bank in Denver and )ohn Napoli, Jr., a 
man alleged to have close ties to New York's Lucchese crime family. Rupp and 
Napoli would both later be convicted of bank fraud for this scam. Court doc- 
uments showed that Napoli had an opportunity to buy $9 million in stolen 
currency for $2 million from a contact named "Al." Napoli had arranged with 
Aurora Bank officers for the bank to loan millions of dollars to various people, 
and regulators later claimed that Delvecchio and Rizzo agreed to borrow 
$350,000 from Aurora.-- (Later, when Rizzo was sued by the FDIC for his 
involvement in this deal at Aurora, he refused to answer questions and invoked 
the fifth amendment because he said he was the subject of a criminal investigation 
in another jurisdiction.) 


Rupp claimed to be a longtime CIA contract pilot. His attorney told us that 
in the 1970s he flew for Global Air International out of Dallas. When Rupp 
was convicted of bank fraud in connection with the Aurora Bank case, a witness 
for the defense told the judge that the CIA commonly used financial institutions 
to launder drug money or scam loans before sending the money off to the Contras 
or to various other covert purjxjses.-' Among the financial institutions the witness 
named as having been used in this way were Aurora Bank and Flushing Federal.-'' 

Rapp apparently decided that taking out loans, or getting a share of loans 
that he arranged for others, might be a promising way to make ends meet. Clearly 
something new and exciting was happening in the once stodgy world of savings 
and loans, something that would welcome his kind of expertise. So Mike 
Rapp — former stockbroker to the mob, former jailbird, former informant — 
became Mike Rapp, loan broker and matchmaker. In short order a colorful cast 
of characters found their way to Mike's door. Delvecchio said a music publisher 
from Beverly Hills named Steve Metz arrived with big plans to buy his own 
bank. Texas investor Frank Ncgrelli, who was interested in oil and gas leases, 
also showed up, as did Owen Beveridge, a deposit broker from Long Island, and 
William Smith (he claimed to be a former CIA agent), who owned a travel 
agency that sponsored, among other things, gambling junkets to the Dominican 
Republic. And Rizzo and Delvecchio were around. Delvecchio said they all 
had business propositions for Mike Rapp — everything from investments in oil 
and gas leases to the purchases of banks, S&Ls, hotels, and casinos. For a finder's 
fee, or a piece of the action, Rapp's job was to put these men's ideas together 
with money to fund them. (Delvecchio has since sued Rapp over the collapse 
of their business arrangements. ) } 

Another visitor to Rapp's home/office was Lionel Reifler, a man whose 
background was similar to Rapp's. In 1970 Reifler had pleaded guilty to stock 
fraud; in 1975 he pleaded guilty to selling unregistered securities and was sen- 
tenced to two years in prison. In 1973 Reifler had drawn the attention of in- 
vestigative journalist and author Jonathan Kwitny, who gave him less than 
honorable mention in his book on white-collar crime in America entitled Foun- 
tain Pen Conspiracy. Reifler was now running a realty office in Fort Lauderdale, 

These characters gravitated to Mike Rapp because he knew how to get mone>'. 
Besides cutting his teeth on Wall Street, he had studied under master bank fraud 
artist Erwin Layne. a swindler who pulled scams for X'incent Gugliara, a soldier 
in New York's Colombo crime family. Layne's specialty involved a scam where 
he'd take possession of stolen bonds (usually obtained by the mob) and then 
move the bonds to banks and obtain loans against the bonds. During the days 
when he was still Michael Hcllcrnian, Rapp had taken special note of the way 

"Miguel" ■ 139 

Laync operated. Hellcrman even described Layiie's system of scamming banks 
in Wall Street Swindler. 

Speaking of Erwin Laync, Hellerman wrote, "... bis next step was to borrow 
$10,000 or $15,000 from one of tbe wise guys, select a bank, and then open 
an account at that bank. He established himself at that bank as a construction 
executive and became friendly with a vice president of the bank. Once that 
friendship was established Layne began a carefully choreographed program of 
wining and dining the banker, providing a prostitute (whom the banker was led 
to believe was Layne's wife) and paying her to seduce the banker behind his 
back in a la\ish]y furnished apartment. . . . The setup for the scam might last 
six months, until Layne was convinced that he had the banker on the hook. ..." 

The banker thus compromised, the final step was to get large loans from 
the bank. The banker, torn between guilt and fear that Layne would find out 
he was sleeping with Layne's "wife, " would bend over backward to accommodate 
Layne. Any resistance on the part of the banker was weakened by the "wife," 
who would beg the banker to make the loan so they could continue their affair. 
Once the loans were in hand, the only thing left for the swindler to do was to 
pull up stakes and leave town. It was a classic bank scam. 

In the spring of 1984, Rapp had an idea that didn't stray too much from 
Lavne's blueprint. Rapp, of course, would add some variations of his own, but 
the end result would be the same. His target would not be a bank, however. He 
was intrigued by thrift deregulation and the stories about Flushing Federal Sav- 
ings, and he had decided to make friends with Carl Cardascia, the president of 
Flushing Federal. 


Flushing Gets a Bum Rapp 

Car! Cardascia, in his forties, had been president and chief executive officer of 
Flushing Federal Savings for about a year. Cardascia told friends he had never 
finished college and hated paperwork. Still, he had been a dedicated employee 
of the S&L since the late 1960s when he had begun working his way up the 
Flushing Federal ladder. He was no financial genius, but operating a savings 
and loan association did not exactly require an MBA. Cardascia picked close 
friend Ronald ). Martorclli as his right-hand man, making him a vice president 
and Flushing's chief lending officer. Prematurely balding, Martorelli was small- 
framed and wore glasses. He was a graduate of Hofstra University and, like 
Cardascia, had worked his way up the ranks at Flushing Federal, starting as a 
part-time teller in 1974 when he was just 17. 

A federal judge would later describe Cardascia as a "careless," "incomp)etent" 
thrift president. He didn't like to waste his time studying financial statements 
and credit reports. Instead, he just made "an informal t)pe of analysis within 
his own mind" about whether an applicant for a loan would be able to repay 
or not, Martorelli explained later. By mid- 1984 Flushing Federal wasn't doing 
well. It was growing quickly (it had assets of about $578 million, thanks to 
brokered deposits) but was losing money. The Federal Home Loan Bank of New 
York slapped Cardascia with a supervisory agreement that forbade the S&L to 
make loans of more than $500,000 to out-of-state residents and more than $1 
million to New York state residents. Flushing was also ordered to improve the 
documentation behind its loans. 

But soon thereafter a realtor introduced Cardascia to World Wide Ventures. 
Cardascia apparently did some of his "informal analysis within his own mind " 
and decided World Wide Ventures looked like a pretty good risk. Court records 
showed Flushing Federal gave World Wide not only the $500,000 loan that 
Rizzo and Delvecchio later told Rapp about but also granted the company a $5 



Flushing Gets a Bum Rapp '141 

million line of credit. What Cardascia's informal analysis had not disclosed was 
that World Wide Ventures, according to regulators, was for the most part worth- 
less. It had .some rights to the bare land in the Poconos, but that was about it. 
On the surface World Wide looked like a company on tiie way up. But authorities 
would later claim that behind the scenes a friendly stockbroker was actually 
manipulating World Wide's stock and artificially inflating its price. 

In June, World Wide President Lorenzo Formate brought a Florida busi- 
nessman friend of his to Flushing Federal's corporate headquarters in New York 
and took him up to Cardascia's office on the second floor. 

, "Carlo," Formato said, "I'd like you to meet a friend of mine, Mike Rapp." 

"Glad to meet you, Carlo," Rapp said, shaking Cardascia's hand. Michael 
Rapp told Cardascia that he was a businessman in search of financing for some 
projects he was considering, including the purchase of People's National Bank 
up in Rockland County. And there was a bank out in Oklahoma that he and a 
partner of his from Texas had their eyes on. Plus, he was looking at the purchase 
of oil and gas leases in Texas. Rapp mentioned that he could arrange for large 
deposits to be brokered into Flushing Federal. Cardascia, who evidently trusted 
Formato, listened to Rapp's rap. Over the next month or so, according to federal 
investigators, Rapp successfully applied the Erwin Layne formula to Flushing, 
with a couple of twists and flourishes of his own, of course. 

Rapp began by wining and dining Cardascia and, according to one federal 
agent, even took the Flushing Federal president to Atlantic City on a little 
gambling trip. Although nothing was ever made of it, there were rumors that 
Rapp began buying presents for Cardascia and his wife — a set of golf clubs and 
a fur coat. Delvecchio said that along the way Rapp gave Cardascia an earful 
about his business plans. Then Rapp invited Cardascia and his wife to a benefit 
cocktail party in New York where Rapp's old friend Frank Sinatra was supposed 
to sing a song or two. Sinatra never showed, but his wife did, and since it didn't 
take much to impress Cardascia, that did the trick. 

Rapp knew Cardascia's S&L was in trouble and needed money, and Mike 
knew where to get it. Delvecchio told authorities that Rapp, together with money 
brokers Owen Beveridge and others (Rapp would eventually tap into First United 
Fund too), made sure that Flushing received all the brokered money it needed 
in order to have enough cash to make loans to Rapp and his associates. Initially, 
a meeting was scheduled at Flushing Federal to talk about bringing money into 
the ailing S&L. Rapp, Reiflcr, and Delvecchio went into Cardascia's office, and 
Cardascia buzzed his young protege, Martorelli, who then met Rapp and Reifler 
for the first time. Everyone shook hands. During the discussion Rapp told 
Cardascia he could bring at least $13 million in CDs into Flushing. 

Martorelli and Delvecchio would later tell authorities how the deal worked: 
Rapp arranged to have the money deposited at Flushing free of any brokerage 
fees — all Flushing had to do was agree to loan to Rapp and his partners $250,000 


of each million Rapp brought in. (Normally, the financial institution paid a 2 
percent to 5 percent brokerage fee for brokered deposits it received. Rapp was 
taking a page out of Renda's book and offering to place the deposits at the 
institution without cost to the thrift. ) 

Rapp's friends started shaking the Flushing Federal money tree in June 1984 
when according to the FSLIC, a World Wide associate was granted a $250,000 
line of credit and Reifler's realty company got $250,000. Martorelli said no credit 
checks or applications were ever filled out by the hso. All of the loans were 
unsecured. No sooner had Flushing shelled out $250,000 to the World Wide 
associate than the borrower's name apjjeared in the newspaper as the owner of 
a warehouse full of counterfeit highway tokens seized by FBI agents in Brooklyn. 
He was promptly arrested. Martorelli rushed into Cardascia's office waving the 
article about the arrest.' Cardascia looked it over. "I'll look into it, Ronnie. 
Don't you worrv'. I'll take care of it," he reportedly said. 

Federal authorities claimed that even as the money flowed Rapp continued 
bringing new loan proposals to Flushing. The money from these loans, Del- 
vecchio said, was supposed to go into high-yield oil and gas leases, and Rapp 
and his partners were buying a bank in Oklahoma. Also, Rapp, Rizzo, and 
Delvecchio were supposedly going to buy a hotel and casino in the Caribbean. 
All these investments would turn big profits and Flushing would get its money 
back, plus. By that time Rapp appeared to have gained Cardascia's total confi- 
dence. After all. how could Cardascia not trust a man who knew Frank 
Sinatra — personally? Rapp reassured Cardascia that he, Michael "Miguel" Rapp, 
would distribute loan proceeds to the borrowers he lined up. Martorelli said 
Rapp also promised Cardascia that he'd make sure the interest on the loans was 
paid in a timely manner. 

With Flushing Federal under the watchful eye of federal regulators, Rapp 
couldn't take out too many loans under any one name without drawing suspicion 
so he set up a maze of phony corporations, prosecutors later proved. Through 
that paper corporate empire he and his friends could borrow money without 
putting their own names on paper. Rapp's scam at Flushing was just one big 
Ponzi scheme — regulators claimed he took out new loans to make payments on 
old loans and he and his ft-iends pocketed any difference. Delvecchio told au- 
thorities that when Rapp set up a new company he'd show up at Flushing's 
headquarters, sometimes with Smith or Metz, other times with Rizzo and Del- 
vecchio. They'd fill out a loan application for the new front company. Delvecchio 
said, and be out the door with a Flushing Federal check in hand the same day. 

For example. Glen Grotto Inn, a Rapp company that was a mere shell with 
little or no assets, got a whopping $300,000 line of credit out of Flushing which 
later was increased to $700,000. By October 1984 Rapp was feeling so brazen 

Flushing Gets a Bum Rapp • 1 43 

that he even took out a $350,000 line-of-credit loan using his own name. He 
just walked into Flushing and filled out a loan application. Martorclli said 
Cardascia gave the nod and Martorclli cut the check. On that particular day 
Rapp brought his pal Jilly Rizzo with him. and regulators said Rizzo took the 
opportunity to pick up a quick $200,000 loan for himself while he was in the 

Notwithstanding Martorelli's growing concern, Cardascia continued to turn 
on the loan spigot for Rapp and his friends. But Martorclli said that in late 
October. Cardascia (who later claimed he did not know at this time of Rapp's 
other life as Michael Hellerman) finally voiced concern to Rapp that regulators 
were due to inspect the S&L's books soon and if Rapp didn't come up with some 
collateral for all the loans he was arranging, there might be trouble. 

"Carlo," Rapp reportedly said to Cardasica, "don't worry." 

Rapp certainly wasted no time worrying. No oil leases ever materialized, 
nor did any of Rapp's other ventures that he spun elaborate stories about to 
Martorclli, who said he became increasingly skeptical. But Rapp feathered his 
own nest well. He lavishly furnished his Bar Harbor home and showered his 
new wife, Janet, with expensive diamond broaches, rings, and gold watches. 
Delvecchio said he saw Rapp refurnish his Florida ranch house with Flushing 
Federal loan proceeds and buy what he'd heard amounted to half a million 
dollars' worth of jewelry for his wife. In November, Rapp was having lunch with 
Delvecchio at the Waldorf-Astoria on Park Avenue in New York when a delivery 
boy arrived at Rapp's lunch table with two fur coats. Rapp told him to take the 
furs up to his wife's room. Janet Rapp soon returned the kind gift by throwing 
a party for her loving husband. The party cost around $100,000 but no matter, 
she just wrote a check, a Flushing check, ^ Delvecchio said. 

By late October 1984 Cardascia was insisting that Rapp come up with col- 
lateral to cover the loans he'd received from Flushing. Most were still current, 
mainly because Rapp was using part of the newer loans to make payments on 
the others,' but Rapp probably figured he'd better cover the loans with something 
that at least looked like collateral before Cardascia had a nervous breakdown. 
Stock seemed like a good idea, so Rapp worked out a deal with a friend in Texas 
who needed a loan. The friend lent Rapp stock in a company he owned in 
return for a later loan. Rapp then put the stock up as collateral for most of the 
lines of credit he had previously arranged at Flushing. And while he was there 
he took the opportunity to get another $350,000, regulators later charged. (The 
stock later turned out to be worthless. ) 

But that was just a temporary fix and Rapp knew he would soon need a new 
source for loans. Flushing Federal was tapped out. Also the Flushing Federal 
loans were all coming due soon and he needed a way to deal with that too. 
Rapp began looking for a bank or savings and loan he could buy and control 
himself. He had been trying to set up a deal for Jilly Rizzo and Steve Metz to 


buy the People's National Bank in Rockland, Count\', Raniapo, New York. 
Rizzo and Metz were to be appointed to the bank's board of directors. Rapp said 
he had received assurances from his old friend Frank Sinatra that if Rizzo 
acquired the bank, Sinatra would serve as a director. Rapp was also telling 
interested parties that he had director commitments from singer Sammy Davis, 
Jr., and former President Gerald Ford. A lot of big talk . . . but no deal.'' 

Then a better opportunity to buy a bank came along at the end of 1984, 
and Rapp decided the Flushing Federal could do for him, after all he had 
done for Flushing Federal, was to loan him the down payment. Martorelli said 
Rapp walked into Flushing accompanied by William Smith, the self-acclaimed 
ex-CIA agent. They clustered together in Cardascia's office. After a short time 
Cardascia buzzed Martorelli on the office intercom and asked him if he'd ever 
been to Texas. When Martorelli said he had not, Cardascia told him to pack 
his bags, he was leaving for Texas that day. Cardascia told Martorelli he would 
be representing Flushing Federal in a big deal. 

It was Monday, December 4, and within an hour Flushing had cut Bill 
Smith a $700,000 check off a commercial line of credit. Rapp, Smith, and 
Rapp's attorney left to make the travel arrangements and said they'd return in 
an hour to pick up Martorelli. After they left Cardascia told Martorelli that the 
group was going to buy the First Bank & Trust Company in Duncan, Oklahoma, 
140 luiles north of Dallas. Once the bank deal was closed, Rapp would give 
Martorelli a check from the Duncan bank to pay off all the loans he and his 
friends had taken out of Flushing. Martorelli had two jobs on the trip: first, keep 
a close eye on the $700,000 check, and second, bring back the check paying 
off the Flushing loans.' 

Within two hours Martorelli was on a plane to Dallas, carrying the $700,000 
check Flushing had cut for Smith. That night they all stayed in a Dallas hotel 
and the next morning Rapp chartered two planes at a nearby airport and flew 
his entourage, including Martorelli, to Duncan, Oklahoma, "to check out the 
bank." A little tire kicking, as it were. Rapp told Martorelli, "We're going to 
meet the bank's president, the directors, and a couple of shareholders." Which 
Martorelli later said seemed reasonable enough to him. After all, he didn't expect 
Rapp to buy a pig in a poke. That afternoon Rapp and his entourage arrived at 
the Duncan bank. More meetings, dinner, and more meetings, but no deal. 
Martorelli waited outside while Rapp et al huddled with the bank officials. At 
one point during the negotiations Rapp came out of the meeting and asked 
Martorelli for the $700,000 check. 

"They want to see it. It's the earnest money in the deal," Rapp told him. 
Ron handed over the check. Later that evening, after the meeting ended, Rapp 
gave the check back to Martorelli. Still no deal. 

That night they flew back to Dallas, and Martorelli called Cardascia to 
inform him of the progress. 

Flushing Gets a Bum Rapp '145 

"Nothing so far," Martorelli said. 

The next morning Rapp met MartorelH back at the Dallas hotel for breakfast. 
Martorelli asked him how the deal was going. "We're still trying to iron out 
some details. But it looks good though," Rapp said. "It should happen shortly." 
Rapp then asked Martorelli for the $700,000 check again. Martorelli handed 
the check over. It was Wednesday. Martorelli called Cardascia. 

"Is the deal going to happen or not?" his boss asked. 

"I don't know." 

"Okay, if nothing happens by tonight, come back to New York.'.' 


The next morning Martorelli was on a plane back to New York. No deal 
and no check. The $700,000 was firmly in Rapp's hands. 

Martorelli said Cardascia told him not to worry about the money. Cardascia 
said Rapp's purchase of the Duncan Bank was imminent and the deal was just 
awaiting approval of the Federal Reserve, the regulatory agency that had oversight 
responsibility for the First Bank & Trust Company of Duncan.'' It seemed to 
Cardascia that the Duncan Bank acquisition was on the verge of being a done 
deal. But he informed Rapp that Flushing still needed more collateral on all 
the money it had lent to Rapp and his friends. The regulators were starting to 
sniff around the S&L's vault. Rapp told Cardascia not to worry, he'd take care 
of the situation. Rapp promised Cardascia that he would have enough deposits 
placed at Flushing to offset all the lines of credit that he'd arranged since May. 
Satisfied, Cardascia agreed to make more loans to Rapp and company. The 
FSLIC charged that Rapp got $350,000 for another dummy company that he 
had set up, Jilly's Enterprises got another $350,000 and a friend of Delvecchio's, 
acting as a straw borrower for Rapp, walked in and got a $575,000 line of credit. 
Authorities later alleged Rapp paid the straw borrower $5,000 and promised him 
a $50,000-a-year job with Jilltone, a new company Rapp was setting up with 
Jilly Rizzo and Delvecchio. (Delvecchio said Jilltone was trying to buy a hotel 
and casino in Santo Domingo.)' 

Rapp told Cardascia to have Martorelli pick up the collateral for all the loans 
on December 17, 1984, at the Regency Hotel on Park Avenue in New York.* 
The last time Rapp had promised to produce collateral for the loans he was 
getting from Flushing, he had given Flushing worthless stock that he didn't own. 
This time the collateral was to be $8 million in certificates of deposit that Rapp 
supposedly had on deposit at Co-op Investment Bank, Ltd., an offshore bank 
based in St. Vincent in the West Indies. Dollar for dollar the face value of the 
CDs matched the lines of credit that Rapp and his friends had received at 
Flushing. Cardascia sent Martorelli to the Regency Hotel and as Martorelli 
walked into the room he looked at the familiar faces. 

"You know everyone," Rapp said. 

"Yes, I know everyone," Martorelli said. 


Rapp read the pledge agreements that Martorelli had brought. He didn't like 
some of the language in the agreements and decided to change it. 

Martorelli said Rapp snapped, "I don't like this clause." The clause he 
disliked \vould'\e allowed Flushing to claim the CDs as collateral prior to the 
maturity date of the CDs. Martorelli didn't argue with Rapp because the CDs 
were scheduled to mature before the loans came due an\-\vay. Rapp took a p)en 
from Martorelli and made the change. Now Flushing couldn't claim the CDs 
until they matured, which wasn't for several months. Rapp then handed the 
passbooks to Martorelli. The pledges and passbooks in hand. Martorelli headed 
back to Flushing, feeling that at last the bank had securit)' for all the questionable 
loans Cardascia had approved for Rapp. Ever>one breathed a sigh of relief With 
the old loans now supposedly secured, Cardascia approved another round of 
loans totaling $1.2 million. Regulators claimed Rapp used part of the money to 
keep his earlier loans current. The CDs Rapp had gi\cn Martorelli were bogus, 
but it would be a while before Flushing found out. Rapp later admitted that he 
had paid a $1.5 million fee to Co-op Bank and the company's president to set 
up the phony CDs. Trying to cash them would be like grasping at a mirage. 

By the early days of 1985 too many "interesting jjeopie" were hanging around 
Flushing Federal and too much money was heading out the door. Both regulators 
and the FBI were poking around asking questions. Matters got worse when a 
top executive of a company that had been selling home improvement loans to 
the S&L was found murdered in his car in Bayside, Queens — Mike Rapp's old 
neighborhood. New York's Daily News described the murder as a mob-st>!e hit. 
The FBI declined to talk to us about the case, noting that its investigation was 
far from being a closed matter, but we did learn that Flushing had been losing 
millions of dollars on the loans it had been buying from the dead man's company. 

The FBI zeroed in on the murder case, and while Agent Michael Shea was 
poring over Flushing's loan files he discovered a group of names that sounded 
terribly familiar, including Rapp's. By chance the FBI had found fomier pro- 
tected witness Michael Hellerman. It took only a phone call to verif>- that Michael 
Rapp and Michael Hellerman were one and the same and that Hcllemian had 
once been the mob's {personal stockbroker. Another agent familiar with the case 
said that the lines of credit put together by Rapp "looked like a who's who of 
organized crime. " The FBI also discovered the name of another convicted stock 
swindler: Lionel Reifler. 

In early April 1985 Cardascia was forced out of his job by the New York 
FHLB. Later that month Flushing was taken over by the FSLIC. The S&'L was 
in the hole by at least $50 million and would wind up costing the FSLIC close 
to $100 million. Starting in April, attorney Andrew Donnellan, with the New 
York law firm of Dewey, Ballantine, Bushby, Palmer &• Wood, started inves- 

Flushing Gets a Bum Rapp • 147 

tigating Flushing's failure for the FSLIC. Also on Rapp's trail were the FBI and 
the U.S. attorney's office in Brooklyn. 

While the Flushing investigation was in its early stages, Rapp was allowed 
to continue to operate unimpeded, despite federal suspicions. We had seen this 
happen hefore: FBI agents in one city focusing only on what a suspect did in 
that jurisdiction and never checking to see if that person was operating (or had 
operated already) somewhere else. Rapp had similar scams in progress at thrifts 
and banks in California and Florida, so when Flushing collapsed he just shifted 
his attention to other fronts. But his relationship with his associates was becoming 
strained. He argued with Reifler and threw him out of his house. When the 
Texas businessman who had loaned Rapp the worthless stock was questioned by 
the FBI, he became furious with Rapp for getting him involved. Later he testified 
that Rapp threatened to have him killed if he didn't shut up."* Law-enforcement 
officials said Rizzo's deal to buy People's National Bank of Rockland fell through 
because the Federal Reserve wouldn't approve it, and Delvecchio said he and 
Rizzo, sensing trouble, started avoiding Rapp. 

Later Delvecchio told investigators that Rapp essentially "robbed the 
bank," that he "finagled the bank out of money with other people involved." 
Delvecchio said he was mad at Rapp for the way he was wasting money 
when he was supposed to be investing it for the gang. Delvecchio brought his 
personal phone books to a deposition, apparently as a reference tool. Donnellan 
threatened to have Delvecchio's phone books entered as evidence in the case, 
and he grilled Delvecchio on whose names and numbers were in the book. 
Among them were all of the players involved with the Flushing lines of credit, 
including Rapp and Delvecchio's good friend Jilly Rizzo. Delvecchio had 
many different phone numbers for Rizzo, one of which was a New York phone 

"Rizzo has a New York phone number?" Donnellan asked. Rizzo's residence 
had been listed as Rancho Mirage, California. 

"Yes, he does, " said Delvecchio. "Write that number down and call it up. 
Find out who answers." 

"What is it?" asked Donnellan. 

"Frank Sinatra's number," said Delvecchio. Donnellan let the matter drop. 
A couple of minutes later Donnellan took the book and found the name of John 

"You have John Wayne's number in here?" asked Donnellan. 

"Yeah," said Delvecchio. "You want to talk to him? You'll have to get a 

None of this slowed Rapp down. He was used to making and losing friends, 
and he was already building bridges to new ones. In 1985 a mutual friend, a 

148 ■ INSIDE )OB 

banker in Houston, suggested to Rapp that he contact Charles Bazarian in 
Oklahoma Cit\'. Cliarhe had plcnt>' of money, he said, and might be willing to 
loan to Rapp. Rapp liked the idea and in October he and William Smith flew 
to Oklahoma for a meeting with "Fuzzy." Mario Rcnda, who had gotten to 
know Bazarian at Con.solidated Savings, had flown out from New York to attend 
one of Charlie's famous Halloween parties and was already at the Bazarian 
mansion when Rapp arrised. 

The meeting between Bazarian, Renda, and Rapp came at a critical time 
for Renda and Rapp. Renda's indiscretions with Winkler at Indian Springs State 
Bank and Coronado Savings had led to the FBI raid on First United Fund 
headquarters a year earlier. Since then investigators had been all over him. He'd 
gotten bad press and cash flow was a real problem. Rapp was having similar 
troubles. His old friends didn't trust him anymore and he was having a hard 
time finding financial institutions that would take his bait. Bazarian, on the 
other hand, was still riding high. He was plugged right into a number of financial ' 
institutions, and his company, C.B. Financial, could still swing millions in 
loans anytime he wanted. 

All the ingredients Rapp required to solve his current problems were present 
at that meeting. He had a scam in mind, but he couldn't pull it off alone. He 
needed help. Above all else he needed $10 million in seed money to prime the 
pump. Rapp laid out the deal for the other two men: 

There was this bank in Florida, the Florida Center Bank in Orlando, he 
said. Its directors were anxious to sell out, if they could make a killing on their 
stock, and they were willing to work with him on a deal that could leave Rapp 
with the bank in his hands. To pull it off he needed just $10 million for two 
or three days. Five million would be used to buy a CD at Florida Center Bank, 
for which the bank agreed to pay him $3. 1 million interest in advance (ten years' 
worth of interest in advance). In addition the bank would loan him $3.8 million 
(using the same $5 million CD as collateral). Then he'd combine the $3.1 
million and the $3.8 million and buy a $6.9 million CD, on which the bank 
would pay him ten years of up-front interest and on which they'd grant him 
another, even larger loan. He would repeat the process three times, in about 
that many days, and it would generate enough money to repay Bazarian his $10 
million plus $300,000 for his trouble. 

The other $5 million that Bazarian loaned him, Rapp said, he'd use to buy 
controlling interest in the bank. And once Rapp controlled Florida Center Bank, 
he'd be in a position to make loans to Bazarian, esf)ecially if Rcnda funneled 
deposits into Florida Center Bank so it had plenty of cash. Rapp said he wanted 
to start a pay telephone business with loans from Florida Center Bank. 

Charlie didn't have $10 million in cash right then, but he had a checkbook 
and an idea. He agreed to give Rapp two checks for $5 million each, but he 
didn't trust Rapp and asked his house guest and friend, Mario Renda, to ac- 

Flushing Gets a Bum Rapp '149 

company Rapp and tlic hvo $5 million checks to Florida. Bazarian offered to 
pay Renda $150,000, and Renda agreed to go.'" Getting involved in the deal 
was a foolish move on Renda's part. He knew federal prosecutors were in pos- 
session of all his First United Fund records and those of his chief accomplice, 
Franklin Winkler. They would be watching his every move. But apparently he 
just couldn't refuse the $150,000 — or the promise of a new scam. 

With Ba/.arian's $10 million, Rapp finally had his best crack yet at getting 
his own bank. He flipped the CDs up to $10 million as planned, Bazarian's two 
$5 million rubber checks were covered before they could bounce, Renda started 
brokering deposits into Florida Center Bank, and Rapp started making sweetheart 
loans out the front door. 

One successful deal under way, Rapp and Bazarian began looking for other 
business opportunities. Bazarian owned 9.9 percent of Local Federal Savings 
and Loan in Oklahoma, and he decided he wanted to sell his stock to Rapp and 
Rizzo. He set up a dinner meeting at Pier 66 in Tampa between Rapp, Rizzo, 
a stockbroker named Marc Perkins, his boss, and others. The purpose of the 
meeting, according to Perkins, was to discuss the sale of Bazarian's Local Federal 
stock. Perkins, referred by an acquaintance of Bazarian's, had never met any of 
the group. When he arrived at the restaurant Bazarian introduced him to the 
others. During cocktails Perkins listened as the men talked, then he excused 
himself. In the restaurant lobby he ran into his boss, who had earlier left the 
table, and he remarked to him, "You wouldn't believe the bullshit these guys 
are talking. I don't think these guys have enough money to pay for cocktails, 
much less an S&L." 

The group settled in for dinner. The waiter brought the soup. Perkins made 
small talk with Rapp about their mutual interest, stocks. Suddenly, Perkins later 
told us, one of the men leaned across the table and nonchalantly asked Rizzo, 
"Hey, Jilly, you ain't packing a piece tonight, are you?" 

Rizzo didn't respond and just looked the other way, as if to say "How 
indiscreet." Perkins almost choked on his soup. After composing himself, he 
left the table and phoned his wife. 

"Honey, you have to call me back in a little while and have me paged. Say 
there's a family emergency or something. I have to get out of here. You wouldn't 
believe what's happening." 

When he returned to the table the men were discussing Rapp's and Rizzo's 
proposed buyout of Bazarian's Local Federal stock. Rapp told Perkins about his 
prior conviction. Perkins told Rapp that a felony conviction precluded Rapp 
from participating in any such stock transfer and that he, Perkins, wanted no 
part of any of this business. Perkins liked his name and didn't want to have to 
change it. 

"They were going to buy the Local Federal stock using Local's own money," 
Perkins said later. Just like the Florida Center Bank bust-out. 


In June 1985 the FSLIC. on behalf of Flushing, sued Rapp, Cardascia, 
Formato, Rizzo, Delvecchio, Beveridge, Smith, the companies they controlled, 
and others. The FSLIC charged that Cardascia was "corrupted" by Rapp and 
his associates and that he aided and abetted in a scheme to defraud the S&rL 
via 22 lines of credit, all of which went into default. The FSLIC charged that 
Cardascia didn't have the authority to grant the sizable lines of credit. (Several 
months later Cardascia was dropped from this RICO suit and named prominently 
as a defendant in a separate suit against just Flushing's former officers and 
directors, mainly Cardascia and Martorelli.) 

A judge promptly imposed a $7,000-a-month spending limit on Rapp, but 
in February 1986 U.S. marshals in Miami arrested Rapp for exceeding those 
limits. According to court records, he had spent $44,000 in one month. The 
judge charged him with criminal contempt of court. 

By the spring of 1986 the Justice Department had a better picture of Rapp's 
activities and knew he had to be shut down. One New York law-enforcement 
official familiar with the case put it this way: 

"We knew what Rapp was up to but there was no program to nail him. He 
was running around bilking banks and thrifts and he had to be stopped. So we 
had a meeting down in Tampa. I said, 'This is what he's done and this is how 
he did it. I have an agent in Oklahoma who knows what he did there.' No one 
in the Tampa department could get up to sf>eed on this. It was taking too long. 
So we cooperated — New York, Oklahoma, and Tampa — and we put a case 
together in six months. " 

A whistle-blower at Florida Center Bank helped bring Rapp's scam there to 
a screeching halt, but only after Rapp had withdrawn about $12 million to $15 
million of a $30 million loan commitment the bank had made to him." The 
three bustkateers, Renda, Rapp, and Bazarian, were indicted in September 1986 
and charged with defrauding Florida Center Bank. Assistant U.S. Attorney Ste- 
phen Calvacca prosecuted the case and he said it was one of his most memorable 

He told us that he was about to present a key point to the jury when he 
suddenly noticed the jury's attention was focused out in the gallery. He turned 
to discover, to his amazement, that former heaxyweight champion Muhammad 
Ali had strolled into the courtroom. CaKacca said Ali attended several sessions 
of the trial (as did former Gemini and Apollo astronaut Tom Stafford — the Tulsa 
Tribune reported that Stafford and Ali had both been involved in business deals 
with Bazarian) and always caused a stir. Calvacca knew the defendants had 
arranged this tactic, and he hit upon an idea to turn it around. When Calvacca 
began his closing remarks to the jury, he told them he knew they were wondering 
why Ali had been in the courtroom. 

Flushing Gets a Bum Rapp • 151 

"I told tlicni that Aii had long been an admirer of my courtroom style and 
often attended my trials."'- Caivacea said the consternation at the defense table 
was extreme, but they had already had their last say in the case and they had 
no choice but to swallow hard and accept the fact that their little plan had 
backfired on them." 

Annoying the prosecution was something the three bad-boy defendants 
seemed to relish. F.very day at noon the court broke for lunch, and defendants 
and prosecutors alike retired for their noon meal. But as prosecutors munched 
on their Wendy's hamburgers, Rapp, Renda, and Bazarian sat at a table covered 
with a white linen tablecloth while houseboys served them fresh gourmet deli- 
catessen food flown in that morning from New York: pate, luncheon meats, 
even fresh cheesecake from Leo Lindy's on Broadway. 

"Hey, Caivacea, ya oughta try some of this cheesecake, it's really goooood," 
Rapp would taunt. 

In their closing remarks defense attorneys tried to convince the jury that 
their clients were simply misunderstood entrepreneurs, that stodgy regulators 
just didn't understand their revolutionary and innovative business deals. They 
even compared the three with the Wright brothers. 

Caivacea retorted, "The Wright brothers? These were the Wrong brothers, 
the Blues brothers, the We-Take-the-Money-You-Lose brothers." 

Rapp was found guilty of bank fraud in the case and sentenced to 32 years 
in federal prison and fined $1.75 million. Bazarian was found guilty of three 
counts of bank fraud and sentenced to two years in prison and fined $100,000. 
Renda was found guilty of one count of conspiracy and sentenced to two years 
in prison and fined $100,000.'^ 

As the investigation into Rapp's role in the downfall of Flushing Federal 
and other financial institutions continued, Rapp's troubles mounted. Not only 
was he convicted and sentenced to 32 years in prison for the Florida Center 
Bank seam but he pled guilty to conspiracy and fraud charges in connection 
with the Flushing loans as well. He was sentenced to 10 years in prison for the 
Flushing bust-out, but his term was to run concurrently with the Florida Center 
Bank sentence. 

When investigators began to learn the true extent of Rapp's activities, they 
opened investigations in New York, Los Angeles, Denver, Miami, and Orlando. 
Rapp had kited checks at Sun Bank of Miami (perhaps to the tune of $1 million 
in losses, some said) in 1984. " Similar troubles were also reported by the president 
of Western United National Bank in Los Angeles. When SSDF Federal Credit 
Union near Tampa collapsed in May 1986, regulators discovered it had made 
a large loan to a company allegedly controlled by Rapp because he promised to 
bring in millions of dollars in brokered deposits. Then, comparing notes with 
others, regulators learned that Rapp and his friends had tried unsuccessfully to 
buy several thrifts and banks in Oklahoma and Tennessee. The picture that 


emerged was one of Rapp and a band of associates clearly running a two-year 
looting operation while trying everything within their power to get control of a 
financial institution themselves. 

Plarly in 1987 Lorenzo Formato, who served as president of World Wide 
Ventures, was sentenced to six years in prison for stock fraud in an unrelated 
case brought against him in New Jersey. However, while being sentenced in the 
New Jersey case, Formato cut a deal with the U.S. attorney's office in Brooklyn 
and pled guilty to mail fraud charges stemming from the use of World Wide 
stock as collateral to obtain loans from Flushing. Regulators claimed the World 
Wide stock was worthless. Formato agreed to cooperate in connection with the 
Flushing case. 

Also indicted, and later convicted, were Harold Farrell and Robert Wolk. 
who'd been charged with defrauding Flushing out of $1 million. '" The assistant 
U.S. attorney handling the Farreil-Wolk case would later recall how Farrell 
constantly begged him not to indict: "He came to my office telling me how he 
had heart problems and how prison would kill him," he said. Wolk and Farrell 
were both in their early sixties. 'I didn't believe him," he said with a tinge of 
comic irony in his voice. "He'd been doing the same thing for years with other 
prosecutors. The other prosecutors listened. I didn't. I indicted him and he was 
convicted. A couple of months later he actually did die of a heart attack." 

Regulators sued Rizzo in both the Flushing and Aurora Bank cases. Ken 
Merica, a private investigator in the Aurora case, recalled in 1988 that when 
Rizzo was subpoenaed he ran out the back door of his house in Rancho Mirage 
to avoid being served. 

"You know where he went?" recalled Merica. "He ran over to Sinatra's 
house. He spent the afternoon over there. He thought we'd go away. Well, we 
waited. He came back four hours later and he didn't see us. We served him 
while he was walking up his driveway." 

Cardascia was indicted in October 1988 for extortion and misapplication of 
funds in connection w itli a $240, 500 loan he allegedly had Flushing Federal make 
to Donald Luna, a convicted swindler from Nashville, Tennessee. The case came 
to trial in early 1989, and after hearing all tlie evidence, the federal judge said 
Cardascia was clearly "a man t)f bad judgment " who probably should have been 
fired, but he found Cardascia not guilty of defrauding Flushing Federal in tlie Luna 
matter. Instead, the judge excoriated the Reagan administration, the FHLBB, and 
Congress for pemiitting the tlirift's failure by their negligence. A disappointed 
prosecutor said the grand jury investigation of Flushing Federal would continue, 
and in 1989 Cardascia, Delvecchio, Martorelli, Rizzo, and others were indicted 
in connection with Flushing loans to World Wide Ventures Corporation, Rapp, 
and others. Cardascia was accused of receiving kickbacks, in the fomi of World 
Wide stock, in return for having Flushing make a $5 million loan commitment to 
World Wide. Delvecchio was charged with participating in the deliver*' of tlie stock 

Flushing Gets a Bum Rapp '153 

to Cardascia, and Martorelli was accused of falsifying a document in relation to 
the World Wide loans. Cardascia was also charged with illegally making loans to 
Rapp and his associates in exchange for brokered deixisits from Owen Beveridge 
and First United Fund. (At the time, regulators had forbidden Flushing to take any 
new brokered deposits.) Delvecchio and Rizzo were charged with using fraudulently 
overvalued security (the Co-op Investment Bank CDs and the Poconos property) 
as collateral for loans. 

Rizzo's attorney said, "If it were not for his relationship with Mr. Sinatra, 
there would be no indictment. Mr. Rizzo is an honorable man." 

In announcing the indictments the U.S. attorney said, "It would appear 
from the allegations in this indictment and earlier depositions of other borrowers 
that Hushing Federal was being run like a candy store." 

Investigators were said to be looking into 80 questionable loan transactions 
at Flushing. An assistant U.S. attorney handling the case didn't want to talk 
about it, but she said she'd be using Rapp as a witness against his old buddies. 
Those sued civilly, but not charged criminally, denied wrongdoing in the case. 
Most of those charged criminally refused to talk. The case was pending as of 
this writing. 

As for Mike Rapp, we never expected to hear from him. But in September 
1988 Rapp called us collect from his jail cell in the North Dade Correctional 
Center in Miami in response to a letter we'd sent him asking about the Flushing 
Federal case. The first thing he wanted to know was how we found out where 
he was doing time. 

"A law-enforcement official told us," Paul Muolo replied. 

"No one's supposed to know where I am," he said. Rapp sounded concerned. 
"What's your book about?" 

"The bust-out of S&Ls." 

"Yeah, what's your angle?" 

"Our angle is that the mob and others are busting out thrifts and banks. 
What do you think?" 

"Yeah, that's partially true," he said, and then he paused. Rapp said he 
hoped we weren't going to sensationalize his role in financial failures. He rambled 
on about how "there was nothing illegal in my deal" — a reference to the Florida 
Center Bank case — and how he never told a lie on the witness stand. "Lending 
money to your friends shouldn't constitute fraud, " he complained. 


"I can't talk about any of this, not yet," he said. "I'm appealing my case. I 
may write another book of my own. I've had a couple of offers." Rapp said the 
real "story" behind the S&L debacle "is the regulators." He said they were, and 
are, "incompetent," but he declined to elaborate. 

Paul told Rapp that we had a host of questions we wanted to ask and that 
we would send him a letter outlining our areas of interest. 


We sent him a list of very frank questions about the Florida Center scam 
and waited. Two weeks passed and not a word from Rapp so Paul decided to 
call. Rapp was angr\'. 

"Yeah, I got your letter and 1 don't like your questions. When are you going 
to start being a reporter and stop being a prosecutor? Don't bother me anymore. 
My lawyer is sending you a letter." Paul told him we'd add it to our growing 
collection. Rapp hung up. The lawyer letter never arrived. 

Later, Tony Delvecchio told us that he did not participate in any of Rapp's 
swindles, but he did admit that "a lot of innocent people got hurt. Prominent 
people were swindled." He said Rapp and Napoli knew each other well in Florida 
and added, "One of these days I'll tell all about Rapp and World Wide Ven- 
tures. . . . Yeah, now the feds are talking to Napoli, trying to find out who all 
the top gears are." He said, "Rapp's money is in offshore banks. If he's smart 
enough to con all these people, he's smart enough to have offshore accounts." 

Then Delvecchio hit the point that had been bothering us. "It's amazing. 
Rapp did all these scams 20 years ago and then he writes a book and does it all 
over again. He was good, Rapp was. He convinced a lot of people. " 

The beauty of the Rapp operation, from our point of view, was that it was 
so typical of a wise guy in action. Rapp loved to spend his days figuring out 
schemes. A brilliant man, he could have been successful as a legitimate busi- 
nessman, but the excitement of swindles held too powerful an allure for him. 
From the day thrifts were deregulated, it was inevitable that Rapp would loot 
them. Opportunities of that magnitude could not possibly go unnoticed by 
swindlers like Rapp. But the unanswered question in the Rapp stor\' (and in 
many of the other cases in this book) was — where did the money go? Delvecchio 
said in depositions that Rapp spent $500,000 on jewelry for a girlfriend and 
$500,000 in Las Vegas, which still left a large amount unaccounted for, since 
in a couple of years he got over $20 million from thrifts and banks. 

One answer to that question finally came to us from a law-enforcement 
official who told us that hvo New York crime families, the Lucchese and Gen- 
ovese families, were making demands on part of the take. When a dispute broke 
out over how the money was going to be di\ided up, the matter was finally 
.settled, the official told us, when a friend of Rapp's, an officer in one of the 
families, organized a sit-down at which the families decided how the shell 
corporations would split up the loan proceeds. How much was divided up? 
Rapp's not saying. 

Finding Rapp doing business with Renda and Bazarian was a real surprise. 
When Paul first got the tip to check out Flushing Federal, we did not know of 
any connection at all between the three men. But there they were, on Halloween 
1985, at Bazarian's Oklahoma Citv' mansion, planning a scam. It was a graphic 

Flushing Gets a Bum Rapp • 1 55 

illustration to us of the way the network of swindlers worked. They heard about 
each other by word of mouth. Some were Mafia members and associates; some 
weren't. But they all did business together, and the distinction between organized 
crime and mere white-collar crime blurred until it became almost meaningless. 
The looting of the savings and loan industry was carried out by a band of swindlers 
who operated, and cooperated, in their own best interests. We kept a list of the 
people we found looting each savings and loan we investigated. Bazarian would 
one day taunt us by bragging that he knew everyone on our list. 


Casino Federal 

In the movie Quest for Fire a band of Stone Age men, consumed with the need 
to acquire a cinder from which they could kindle their fires and reap the huge 
benefits fire could bring, scoured the countr>side. To get a cinder they would 
steal and even kill. The quest became an obsession. When we investigated a 
close relationship that we discovered between savings and loans and gambling 
casinos, we learned that certain segments of the business community pursued 
casino ownership with the same passion that cave men searched for fire. They 
flocked to areas where it was rumored the public was about to appro\e gambling. 
They used every tool at their disposal, primarily political and financial, to in- 
gratiate themselves with the local power brokers. 

Because of the skimming and money-laundering opportunities inherent in 
a business that dealt in such a high volume of cash, no one was more dogged 
than the underworld in the pursuit of casinos. Owning a casino was a wise guy's 
most cherished dream. The projjensity of organized crime to circle the casino 
flame had a dual result: Rumors of mob affiliation followed \irtually e\cryonc 
who applied for a casino license, and the gaming control boards that granted 
casino licenses developed a tough licensing procedure designed to weed out 
crooks. Nevada and New Jersey licensed casinos as a means of raising revenue 
and as a way of controlling casino ownership. .^Kpplicants underwent a rigorous 
investigation and interrogation during which Gaming Control Board investigators 
looked for any possible connection bch\cen the applicant and organized crime. 
If even a casual relationship could be established, the license was generally 
denied, hi perhaps the ultimate irony, after thrift deregulation it was much easier 
to own a thrift than it was to own a casino. 

To circumvent the licensing obstacle, men with organized crime connections 
often used "beards, " indi\iduals with clean records who could hold the casino 
license for them. In return a beard was generally rewarded with a piece of the 


Casino Federal • 157 

action cither at the casino or in some other business enterprise. The gaming 
control boards routinely uncovered beards and denied them licenses or, if they 
had already slipped by, threw them out. But other beards would replace them 
in short order, all part of the continuing quest for fire. Sitting on a gaming 
control board was like being a pest-control expert, .some said. They sprayed 
regularly but the roaches always returned. 

Conservative financial institutions shied away from making loans on an 
enterprise with such a colorful hi.story. For this reason casinos were often financed 
bv pension funds' or other large pools of money- that did not have to operate 
under the strict standards that regulators demanded of thrifts and banks. But 
then came the deregulation of the thrift industry and, with it. new owners and 
managers who were only too happy to make loans on casinos. The timing of 
thrift deregulation was serendipitous for those who aspired to own a casino 
because it came just as financing by the pension funds was being closed to them 
bv fierce government antiracketeering prosecutions and seizures. Those who 
pursued casino ownership with a lifetime passion promptly saw the opportunities 
inherent in thrift deregulation. Time and time again, as we researched this book, 
we ran into the casino connection — thrift executives loaning on and investing 
in casinos. 

We first encountered the casino connection when we met Norman B. Jensen 
at Centennial Savings. Jenson was a Las Vegas attorney with a 20-year history 
in Las Vegas gaming, including, at various times, connections with the Crystal 
Bay Club Cal-Neva in North Lake Tahoe and the Thunderbird Hotel, the 
International Hotel (now the Las Vegas Hilton), and the Royal Inn Hotel, all 
in Las Vegas. His "claim to fame," he told us, was the Las Vegas Holiday 
Casino, which he and partners developed, promoted, and operated. He and an 
associate held a $1.7 million mortgage on the Shenandoah Casino in Las Vegas,' 
and in the early 1980s ]enson was also trying to get control of two casinos in 
Nevada, the DeVille and the Crystal Palace.^ We learned of Jenson's casino 
involvement when coauthor Steve Pizzo spotted Jenson's name in a National 
Thrift News article about a Seattle trial of executives of three thrifts that were 
located in Louisiana, Texas, and Washington. Jenson, the story said, was in- 
volved in a complex $4 million casino-financing agreement with the thrifts. We 
wondered how Jenson got involved with three such widely separated institutions, 
and he told us that a loan broker named John Lapaglia, whom he had known 
for 1 5 years, had made the introductions. 

When we researched Lapaglia we found that he was a former Texas vice 
cop who had gone into the real estate business and at one time had maintained 
an office in Las Vegas, which was where Jenson had met him. In the mid-1970s 
Lapaglia owned East Texas State Bank in Beaumont, Texas, for a little over a 


year. In 1984 Lapaglia would apply to own his own savings and loan, Uvalde 
Savings Association, but federal regulators denied the application. 

In the 1980s Lapaglia was the owner of Falcon Financial Corporation, a 
mortgage brokerage firm in San Antonio.' A smooth operator, he reminded 
people of an Arabian merchant. He traveled in a leased corporate plane, ac- 
companied by his man Friday who doubled as a secretary. He said he did so 
because traveling with a woman secretar\' could raise questions. He was rumored 
to be a womanizer, ordering $100 bouquets for pretty receptionists he'd just met, 
but he told us the rumors weren't true. The brokerage business had been good 
to him — he claimed to have brokered $2 billion in loans, on which he earned 
his company hefty commissions of between $20 and $60 million over 20 years. •" 
Perhaps that was why his wife had a dollar sign painted on the bottom of their 
swimming pool at his home outside San Antonio. Associates said he was a high 
flier, living the good life. 

Through his trade as loan broker, Lapaglia had become well acquainted 
with the nation's savings and loans. He was a strong supporter of deregulation 
— as were most loan brokers, because it increased their income potential 
dramatically — and he had developed his stable of favorite institutions. He knew 
which thrift executives wanted to participate in the speculative opportunities (and 
risks) made possible by deregulation. In late 198^ Lapaglia" had sponsored a 
seminar in Acapulco, Mexico. About 25 thrifts, those on Lapaglia's most favored 
list, attended. The topic of the seminar was wheeling and dealing in a deregulated 
environment and those attending were the lenders of choice for Lapaglia's bor- 

When Norm Jenson approached Lapaglia for help in getting loans for the 
Crystal Palace and DeVille casinos, Lapaglia knew just who to talk to — Guy 
Olano, chairman of Alliance Federal Savings and Loan in Louisiana." Lapaglia 
had a close working relationship with Olano. Employees at Alliance said he 
often visited Olano in New Orleans, and one of Lapaglia's former employees 
worked for Olano. (Federal authorities told us Lapaglia brokered $40 million 
worth of loans to Alliance, including loans to himself, his family and his own 
projects, and the thrift lost several million dollars on the loans. Lapaglia denied 
the charge.) Alliance Federal was in Kenner, Louisiana, 40 miles up the Mis- 
sissippi River from New Orleans in the bayou country of southern Louisiana. 
Guy Olano, a New Orleans attorney, was a founder of Alliance Federal and 
later became chairman. He was an arrogant young man in his early thirties, 
Italian, handsome, and stocky. 

"He produced a physical revulsion in me," a fellow attorney told us. "He 
looked like a fat Moammar Gadhafi [sic], curly black hair, dark glasses, wafer- 
thin gold watch, Italian suits. He had a psycho-look in his eyes. He looked 

Once Olano got control of Alliance, it didn't take him long to get in trouble. 

Casino Federal '159 

By August 1982, long before Lapaglia went to Olaiio on belialf of Norm Jenson, 
Olano had already earned his first cease-and-desist order from the Federal Home 
Loan Bank Board. Regulators' documents showed that Alliance Federal ignored 
the order for two years, and finally, on June 11, 1984, the FHLBB demanded 
(and got) court enforcement of the order — the first time in history that the 
FHLBB had resorted to court enforcement of one of its cease-and-desist orders. 
The Bank Board said it did not like Alliance's loose loan underwriting practices 
or the compensation Olano and some of his fellow directors and officers were 
paying themselves. 

But Alliance Savings officers probably knew that short-handed regulators 
were paper tigers, and Olano went right on ignoring government saber rattling. 
In 1984 he tried to buy a Miami bank, and he was represented at that time by 
Miami attorney Jose Louis Castro. A New Orleans attorney described Castro as 
a "great dresser" who was "breathtakingly handsome. " Castro was frequently in 
and out of Olano's office in New Orleans, an FSLIC attorney told us, and Olano 
visited him regularly in Miami. In addition. Alliance made several loans to 
Castro. Later, FBI agents testified in court that Castro had close ties with the 
Colombian Duque and Aroseo organized crime families, which had been con- 
nected to money-laundering schemes at American financial institutions. They 
said Olano may have tried to set up bank accounts in the Netherlands West 
Antilles so he could use the account as a depository for money in the event he 
needed to flee the country. (Castro was later sentenced to ten years in prison for 
bank fraud in a case unrelated to Alliance. ) 

John Lapaglia told us that when he went to Alliance Federal to get a loan 
for Norm Jenson, he was only looking for interim financing (Home Savings in 
Seattle had agreed to assume the loan after one year), and Olano said he would 
be happy to arrange a one-year, $4 million loan.' The agreement was finalized 
during a meeting June 15, 1984, in a private suite at the Sands Hotel in Las 
Vegas. Among those at the meeting were John Lapaglia, Norm Jenson, and 
Guy Olano. 

"We went up to Lapaglia's suite at the Sands, " Jenson said. "We sat down 
and at the time they had loan forms with them, and I think somebody either 
had a secretary with them or someone from the hotel — I can't remember — but 
they had a typewriter they had gotten, and they actually executed final loan 
documents. . . ."'" 

The meeting at the Sands Hotel appeared to be a lucrative one for everyone 
involved. Initially Jenson received $500,000 as the first installment of the $4 
million from Alliance. He promptly sent $50,000 to Olano for "legal fees." 
Regulators later called the $50,000 a kickback. (It was not illegal at that time 
for Jenson to pay a kickback, but it was illegal for Olano, an official of a federally 
insured thrift, to receive one. It later became illegal to receive or pay a bribe to 
a thrift or bank official.) 


Within six months of the meeting at the Sands, AlHance Federal had released 
to Jensen $3.2 million of the promised $4 million for the DeVille Casino. The 
last in.stallment the thrift paid, just before Alliance was seized by federal regu- 
lators, gave us a rare glimpse into just how loan money was often divided up 
among the players. Jenson signed for a $900,000 installment but claimed he 
saw only $22,000 of it. Apparently it was payday on this deal and others were 
in line ahead of Jenson. Jenson later testified that Lapaglia received $250,000 
as his fee for referring Jenson to Alliance and took another $142,000 to pay off 
a loan he had at Alliance. In Jenson's words, the $142,000 was "scraped off the 
deal" by Lapaglia. Lapaglia told us the $250,000 and the $142,000 were his 
commissions for the DeVille and Cr\stal Palace deals. He said Olano took the 
$142,000 for Alliance out of Jenson's loan without Lapaglia's knowledge. 

Asked by FSLIC attorneys why he would sign for $900,000 while getting 
only $22,000, Jenson responded, in essence, that you had to be there. 

"You know, it's hard to put yourself in somebody's sp)ot at the time," Jenson 
responded, "it's almost incomprehensible if you weren't there." 

What did he think happened to the rest t'^he money? 

"They just divvied up the fees and just cut it up. That's what they did.' 
Jen.son was referring to the principal players in the deal: the chairmen of the 
two lending institutions (Raymond Gray at Home Savings, Seattle, and Guy 
Olano at Alliance Federal, New Orleans) and the man who arranged the loan, 
loan broker John Lapaglia. 

Alliance Federal didn't cough up the final $800,000 installment on the $4 
million loan to Jenson because federal regulators stopped the deal. As soon as 
he saw he wasn't going to get the rest of the loan money, Jenson threw the 
DeVille project into bankruptcy. He never told how much of the $3.2 million 
that he did get was "divvied up " in his name. Alliance Federal Savings collapsed 
in 1985 with a negative net worth of over $150 million. Norm Jenson and 
Lapaglia testified against Olano in a bank fraud trial in Seattle in 1987 and 
eventually Olano got 1 5-year and 8-year sentences in federal prison, two of the 
few tough sentences we were to see during our investigation." In June 1989 a 
federal judge awarded the FHLBB an $86 million judgment against Olano and 
four other associates of the thrift. 

An attorney for one of the defendants in the Seattle ttial described Lapaglia 
as "an unctuous witness who professed to be a born-again Christian." During 
his testimony Lapaglia lectured the jury on his deep personal code of ethics, but 
jurors weren't impressed. "The jurors didn't like him," one defense attorney 
recalled, adding that even the U.S. attorney who had called Lapaglia as a witness 
felt compelled to tell the jury they did not have to believe anything Lapaglia 
said unless it was corroborated by other testimony. In the Seattle trial five 
executives of Home Savings near Seattle, Irving Savings near Dallas, and Alliance 
Savings near New Orleans were convicted of bank fraud for creating a complex 

Casino Federal '161 

daisy chain in which officials of the three thrifts made illegal loans to each other. 
Loan brokers had made all the introductions. All three thrifts had, at one point 
or another, been involved with Norm Jenson's DeVille Casino loan. 

One day in the fall of 1985 a mortgage trader walked into the New York 
office of the National Thrift News and told coauthor Paul Muolo that millions 
of dollars had disappeared from a company he worked for. That tip led us to 
investigate Philip Schwab, who owned Cuyahoga Wrecking Company, based 
in Great Neck, Long Island. In 1986 Cuyahoga was the largest demolition firm 
in the United States, with offices in 18 cities from Florida to New York to 
Michigan. Schwab also had a stake in about 40 other development, wrecking, 
and demolition companies and had business connections in every major city in 
the Midwest and on the East Coast. He and his wife, Mary, divided their time 
between a waterfront Mediterranean-style villa near West Palm Beach, F"lorida, 
and a sprawling home in posh Pelham, New York. 

Schwab had been in trouble with authorities for years. In 1963 a Buffalo, 
New York, grand jury had indicted Schwab on three counts of perjury and two 
counts of grand larceny. Two of the trials ended in hung juries, and most of 
the charges were eventually dropped. (Schwab was acquitted ten years later of 
the remaining perjury charge when the witness could not testify— he was 
dead — and the key piece of evidence, a check, purportedly disappeared from 
the district attorney's files on the day of the trial.) 

In 1965 the IRS filed tax liens totaling $128,000 against Schwab's company 
for failure to pay payroll taxes and seized the company's equipment and records. 
A few months later Schwab filed for bankruptcy. When his company didn't 
fulfill its contracts, the insurance company that had bonded Schwab took him 
to court. In court the insurance company demanded to see company records. 
Schwab refused to produce them. The judge cited Schwab for civil contempt 
and ordered him to spend 30 days in the Erie County Jail. 

In 1966 Schwab's mother, who was home recovering from dental surgery, 
was tied up and gagged by a man dressed like a priest while thugs ransacked her 
modest Buffalo, New York, home. No money was taken, and police later spec- 
ulated that the intruders were mob wise guys searching for files on Schwab's 

Schwab's style was to keep his mouth shut when things began to go wrong. 
He consistently refused to talk to reporters and often refused to talk to authorities 
too. He was a tough, self-made man who had made his fortune armed with 
only a high school diploma. He looked like a cross between actors Gene Hackman 
and Ed Asner. A Catholic, he and his wife, Mary, were married in 1949 when 
she was 18 and had raised 14 children together. 

Mary was his partner in all his businesses, and she filed for bankruptcy in 


1969 when one of their businesses defaulted on $25 million in contracts after 
it was seized by the IRS. In her bankruptcy filing she listed assets of $3,500 and 
debts of $8.2 million. Although documents showed she was Philip's partner in 
the company, she claimed to know nothing about it. In court she testified that 
when she asked Philip for details about the family's business finances, "He sang 
to me a medley of .songs." 

"What did he sing?" U.S. Attorney Kenneth Schroeder, Jr., asked. " 'Im- 
possible Dream'?" 

"No," she replied. "He sang 'Raindrops Keep Falling on My Head,' 'I Can't 
Give You Anything but Love,' and "I'ou're My Everything,' and he told me to 
mind my own business." She added, "1 don't know anything about any records. 
I only know that I sign papers. " Schwab took the stand and confirmed he had 
sung to his wife but he declined to answer other questions. Consistent in his 
determination to keep his affairs private, he reportedly took the fifth amendment 
1 56 times. 

Despite his past financial (and legal) troubles, by the early 1980s Schwab 
had rebuilt his empire, and thrift and bank officials were falling all over them- 
selves to make loans to him. Cuyahoga was by then touting a net worth of about 
$70 to $80 million. How could a banker say no?'- Schwab's companies demanded 
such a healthy cash flow that he incessantly scoured financial institutions for 
cash, and finally he decided it would be useful to own a casino, the ultimate 
cash-flow machine. In 1984 he acquired the Mapes Money Tree in Reno for 
about $6.75 million. He renamed the casino Players Casino, and then he showed 
up at Eureka Federal Savings, near San Francisco, seeking financing to renovate 
his new gaming house. 

How, we wondered, had a New Yorker made connections with a savings 
and loan near San Francisco? An attorney for Eureka Federal gave us the 
surprising answer — loan broker John Lapaglia, again. Schwab had hired Lapaglia 
to shop for a loan for him, and Lapaglia took him to Kenneth Kidwell, who 
was president of Eureka Federal Savings. '' Kidwell was the son of Eureka Federal 
Savings' founder, and he had succeeded to power at the thrift just as deregulation 
changed all the rules that his dad had depended upon to build Eureka Federal 
Savings into a respected San Francisco Bay Area institution. Associates said 
Kidwell was cut from a very different cloth than his father. He was flamboyant 
and reckless, and he reveled in the Nevada casino scene. During the time Kidwell 
was head of Eureka Savings he was involved in a number of bizarre events that 
were widely publicized in California. One night police stopped his car after it 
was spotted weaving down the road. Officers suspected that Kidwell was drunk. 
When they searched him they found he was carrying hvo loaded pistols, a . 38- 
caliber strapped to his leg and a .357 magnum. The guns were loaded with 
illegal, armor-piercing, Teflon-coated bullets. (The bullets had recently been 
outlawed because they could penetrate bulletproof vests worn by police. ) 

Casino Federal ■ 163 

Kidwell lined up on the side of law and order when he provided the services 
of Eureka Federal to the FBI on at least two occasions. In 1981 he let the FBI 
and the DEA use Eureka Federal as a cover for a drug sting operation. He 
"hired" the agents and even let them rent a company car, a Mercedes 600. The 
FBI brought more than $3 million in cash into Eureka's vault as part of the 
sting, which did net a drug kingpin, Kidwell later told us. On another occasion, 
in 1982, Kidwell provided agents with covers as part of their sting operation to 
trap car manufacturer John DeLorean, whom they believed was dealing drugs 
(he was later tried and found not guilty). Kidwell let the feds wire and put video 
equipment in his 1,200-square-foot office, which adjoined a 3,000-square-foot 
suite in Eureka Federal Savings' main office building. The suite had a living 
room with two fireplaces, a bedroom with a huge round bed, a bar, and a wine 

Kidwell got close to another FBI informant, Teamster union boss Jackie 
Presser, when Kidwell was contacted by a union official who said maybe "some 
lending activity" could take place through Teamster pension funds. Kidwell 
wrote to his lawyers in 1984 recalling the moment: 

"I have been trying to do business with the Teamster pension fund for a lot 
of years. If I could obtain them as a client, surely every pension fund in the 
U.S. would want to do business with me." (One Teamster deal with Eureka 
Federal Savings, Kidwell said in his letter, would be brokered by Abe "the 
Trigger" Chapman, who has been widely alleged to be a former member of the 
infamous Chicago Murder Inc. gang.) When news accounts referred to Chap- 
man's alleged mob connections, Kidwell dropped the deal. Eureka Federal em- 
ployees told us Kidwell developed a social relationship with Presser. 

Casino loans became a Kidwell specialty. Most lenders wouldn't go near 
them, but Eureka Federal made at least four major casino loans. '■* Regulators 
said Schwab received a $7. 5 million loan from Eureka Federal and paid John 
Lapaglia a $30,000 finder's fee. Schwab also paid Lapaglia $630,000, which 
Schwab claimed was a commission for another loan but which looked to gaming 
board officials like part of the casino loan. If almost 10 percent of the Eureka 
Federal Savings loan ($660,000 out of a $7. 5 million loan) went to Lapaglia for 
a finder's fee, gaming board officials later complained, it was an "inordinate 

But a little matter still needed to be cleared up before Schwab could 
pluck fruit from his new money tree — he was not yet licensed to operate a 
casino in Nevada. Schwab promptly filed an application with the Nevada 
Gaming Control Board. But if he thought that obtaining a casino license 
would be as easy as getting a loan out of Ken Kidwell, he was in for a rude 

While Schwab was awaiting word on his casino application, he took stock 
of thrift deregulation and decided he could also benefit by owning some savings 


and loans. "■ He had been a customer at Freedom Savings of Tampa since 
1984 (Cuyahoga had offices in Tampa), and in December 1985 a Freedom 
Savings officer asked him to invest in Freedom stock. Freedom Savings, a $1.5 
billion thrift that was well known among regulators for its use of high-cost 
brokered deposits to fund risky real estate development projects, was desperate 
for capital to meet a new regulation that increased the size of the reserves an 
S&'L had to maintain, hi January 1985, FHLBB Chairman Ed Gray had tough- 
ened the reserve requirements in an attempt to stop the fast growth and risky 
lending that he saw in progress all over the country.'^ The new regulation 
caught a lot of high-flying thrifts like Freedom Sa\ings with their reserves down, 
and Freedom officers were looking for investors willing to pay cash into their 
reserves in exchange for stock. 

When the Freedom Savings officer invited him to buy stock in the thrift, 
Schwab bluntly laid his cards on the table. "1 informed him 1 would but that 
I am a businessman and if I were to invest in a losing bank to help it during 
a difficult time, I would expect a reasonable treatment when I applied for new 
loans. ... It was agreed that I would pick up any shortfall that the other 
investors did not produce. In return I was able to borrow $?.2 million — without 
paying points — for each million worth of stock 1 purchased. . . ."'* In other 
words, Schwab demanded the right to borrow from Freedom Sa\ings three 
times the amount of his investment. It was strictly illegal for an S&'L to make 
such a quid pro quo arrangement, but P'reedom Savings agreed because it 
needed Schwab's investment. 

Schwab paid about $7 million for a 5.9 percent stake in Freedom Savings, 
which promised him up to $24 million in loans, in disregard of regulations 
that forbade an S&'L to make loans equaling more than 10 percent of its assets 
to any one borrower. Court records showed that, as it turned out. Freedom 
Savings actually loaned him $4. 5 million on projects in Arizona and $7 million 
on a project in Philadelphia.'" (All the loans eventually went into default. 
Freedom Savings failed in July 1987.) 

When we checked further into Freedom Savings, we found our old familiar 
friend Charles Bazarian. Charlie was getting to be like a touchstone to 
our investigation — kind of a litmus test to see if a thrift was of the accom- 
modating persuasion. Fuzzy had taken a shine to Freedom Savings, too, and 
he bought a 9.9 percent stake in the thrift. Sig Kohnen, a longtime friend 
of Bazarian who helped him start CB Financial in 198?,-" told the Tulsa 
Tribune Bazarian bought stock in savings and loans as a way to meet lenders.-' 
As co-shareholders in Freedom Savings, Bazarian and Schwab soon struck up 
a relationship, Bazarian told us, and before long CB Financial began arranging 
loans to Schwab ventures. (Those loans would later go into default, Bazarian 

At the same time that Schwab was buying into Freedom Savings in Tampa, 

Casino Federal '165 

he was taking control of Southern Floridabanc Savings Association in Boca 
Raton, Florida, by buying $^ million in preferred stock with a loan from First 
Federated Savings of West Palm Beach. Schwab was on a roll. 

But if things were going well in Florida for Schwab, they were going poorly 
in Nevada. He had hired a consulting firm (that specialized in helping 
people get gaming licenses) to help him navigate the Nevada Gaming Control 
Board investigation. But after listening to Gaming Control Board concerns, 
the consultants handed Schwab a thick report so damning it became obvious 
that he would never pass muster. Schwab's gaming consultants reminded him, 
for example, that the main purpose for allowing casinos in the state was to 
generate tax revenues for Nevada, and the Gaming Control Board was not 
likely to look with favor on someone who had been successfully avoiding taxes 
for 20 years. '^ Schwab's consultants also zeroed in on his maze of companies 
and nonexistent records. In a written report they said Schwab admitted that 
he used money from his companies interchangeably, or funneled money from 
one through another, for whatever purpose he pleased. When asked why his 
companies didn't keep minutes of board meetings, he replied that he and his 
wife had a board of directors meeting every time they sat down together. 

The consultants noted in their report that the Gaming Control Board might 
not be impressed when they learned that Schwab had been called to testify 
before the grand jury investigating the Abscam sting'' and Morris Shenker 
(whom the consultants included on their "persons believed to be unsuitable 
by law-enforcement authorities" list). They were referring to an occasion 
when undercover FBI agents posing as Arabs met Schwab on a boat at Del 
Ray Beach, Florida, and asked him if he could guarantee them a gaming 
license in New Jersey. Their question was prompted, Schwab told the gaming 
consultants, by his association with Morris Shenker and the Dunes Hotel 
and Casino project in Atlantic City. Schwab said his answer to the "Arabs" 
was no. 

Schwab's loan from Eureka Federal Savings, ostensibly to renovate the 
Players Casino, was also under scrutiny by the gaming board. He had put up 
property that had cost him only $1.4 million as security for the $7.5 million 
loan from Eureka Federal Savings. Schwab contended that, no matter what 
the property cost him, it was worth $16 million to $25 million, based on what 
it would be worth as a "going concern" someday. A bank appraisal obtained 
later said the property was worth $267,000, the gaming consultants noted in 
their report. 

When the Gaming Control Board investigators interviewed Schwab, they 
asked him about "meetings at night with potential undesirables" and ten men 
with Italian surnames, prompting Schwab's gaming consultants to comment in 
their report to Schwab, "We have no specific records available to us regarding 
the backgrounds of these individuals. We can only presume at this point that 


the Gaming Control Board has information from law enforcement authorities 
associating these individuals with organized crime activities in the United States." 
Several of the men were connected to Schwab businesses. Schwab admitted 
knowing one of the men was a loan shark but he denied knowing the man was 
also a heroin dealer. 

To top it all off, Schwab's own consultants said he failed to tell the truth, 
the whole truth, and nothing but the truth on his gaming licensing application: 
He told about the old perjurv' indictments but didn't mention the larceny charges 
because, he said, he thought they were the same thing. He also contended there 
were years when he was not employed. Schwab's consultants went on to say that 
he hadn't told about his gambling debts. Further, he hadn't told about all of 
his companies because, he said, "They never did anything" or were "owned by 
other members of the family." 

It was hard, gaming board inveshgators concluded, to "get a handle on you 
[Schwab]." Schwab must have seen the handwritmg on the wall. He dropjjed 
his application for a casino license, defaulted on the $7. 5 million loan from 
Eureka Savings, and beat it back to the East Coast. (Regulators said Schwab 
used part of the Eureka Federal Savings loan for a project he had gomg in 
Philadelphia. Eureka Federal lost between $5 million and $7 million on the 
Schwab loan.) 

What most intrigued us about the Schwab story was the ease with which he 
was able to become a major stockholder in two federally insured savings and 
loans (Freedom Federal Sa\ings and Southern Floridabanc) at the \ery time that 
a Nevada gaming board was finding reasons to deny him a license to run a small 
gambling house. 

After Schwab gave up on the Players Casino project, he overextended him- 
self in real estate developments on Hilton Head Island off the coast of South 
Carolina. Within a year he claimed to be broke. In November 1986 Schwab 
and Mary filed personal bankruptcy in New York (chapter 7 — liquidation). 
Soon Cuyahoga Wrecking filed chapter 1 1 (reorganization). The St. Petersburg 
Times reported that a bankruptcy command post was set up in a large room 
at the Columbia, South Carolina, courthouse right next to a similar one for 
the only other case that size, the bankruptcy of )im and Tammy Bakker's PTL 

Schwab had been a very private man. Only in bankruptcy did the scope 
of his empire become public. L'ltimatcly there would be 15 Schwab-related 
bankruptcies in New 'V'ork, mosth the Cuyahoga companies, and eight in 
South Carolina. Investigators admitted Schwab's business affairs were so 
complex — and. as before, many important records had disappeared, according 
to Schwab's bankers — that they couldn't even tell how many companies 
Schwab owned. At first creditors filed claims totaling $135 million, but 
hundreds of millions were later added. Bankruptcy court records showed that 

Casino Federal '167 

as of July 1988 there were 10'? creditors, including Bazarian's company, CB 
Financial. The overall debts of i'liilip Schwab, Cuyahoga Wrecking, and re- 
lated companies were pushing the half-ii7//on-dollar mark and growing. 
Schwab owed $200 million of that amount to thrifts and banks from Israel 
to California. 

"This bankruptcy has already generated enough paperwork to kill half the 
national forests," said one attorney. 

Representatives of several financial institutions got together to try to figure 
out how to best collect the money Schwab owed them, "it was like an Al- 
coholics Anonymous meeting, with all of the bankers standing up and con- 
fessing their invoKement with Cuyahoga and Schwab," a Chicago lawyer 
present at one meeting told a reporter. Ultimately the bankers decided there 
was no hope. As they would later testify in court, they believed Schwab had 
bamboozled them, sometimes using the same collateral — by moving it secretly 
in the dead of night — to secure several loans at one time. He had operated 
a shell game, they said, that was nothing more than a fancy pyramid scheme, 
using oft-pledged assets (such as steel from demolition jobs) to get new loans 
that he used to pay off old ones. Thrifts banging on Schwab's door included: 
Crosslands Savings in New York, First American Bank and Trust in Lake 
Worth, Florida,-^ Freedom Savings of Orlando, South Chicago Savings in 
Chicago, American Pioneer Savings in Stuart, Florida, Harris Trust and Sav- 
ings in Chicago, Community Savings in North Palm Beach, Eureka Federal 
Savings in San Carlos, California, Southern Floridabanc Savings in Boca Ra- 
ton, Florida, First Federated Savings in West Palm Beach, and Concordia 
Federal Savings of Philadelphia. 

In October 1988 Schwab was convicted of paying an Environmental Pro- 
tection Agency inspector $25,000 in bribes between 1983 and 1987 to overlook 
violations Cuyahoga Wrecking Company committed while removing asbestos 
from building and construction sites. (Schwab had removed the asbestos from 
Carnegie Hall "so Frank Sinatra wouldn't get asbestos in his lungs" when he 
sang there, an employee said.) Schwab was sentenced to 42 months in prison. 
The national media reported that Schwab was also under investigation for vi- 
olations regarding illegal handling of toxic wastes in Maryland and Delaware, 
for other environmental violations in Chicago, and for bank fraud in South 
Carolina. And in New York the U.S. attorney's office, headed at that time 
by headline-making Rudolph Giuliani, was digging into Schwab's deals with 
New York thrifts and banks. 

Another one of Kenneth Kidwell's casino loans went to John B. Anderson. 
Anderson was a giant of a man, six feet three inches tall and barrel-chested, a 
farm boy, mostly a tomato grower, who had grown up in the agricultural com- 


munities near Yuba City, California. He put himself through the branch of the 
University of California in his hometown of Davis in the 1960s, majored in 
agriculture, and began work as a humble sharecropper. The fundamental values 
of hard work and living close to the land stayed with him while he became a 
millionaire many times over. An admirer told us that even after he made his 
fortune Anderson expected his children — to whom he was a good father, his 
neighbors said — to work for minimum wage. 

But to the farmer's solid values Anderson added burning ambition. He told 
his hometown friends that his dream was to be the nation's single largest agri- 
cultural land owner. He knew he would have to accomplish that feat with 
borrowed money, of course, and borrow he did. Along the way he acquired vast 
holdings in Nevada, California, Arizona, and Louisiana. On paper Anderson 
was worth millions, but he was deeply in debt. When the agricultural recession 
hit in the early 1980s, his loans went sour. So, too, did his financial obligations 
elsewhere. By early 1985 newspapers would report that Anderson was being sued 
for $56 million by a host of creditors. 

None of this misfortune dampened Ken Kidwell's willingness to extend 
Anderson credit. In 1984 Kidwell convinced Anderson to buy a controlling 
interest in the Dunes Hotel and Casino in Las Vegas. 

When Kidwell first heard that the Dunes could be bought from reputed mob 
associate Morris Shenker, who had filed for bankruptcy in |anuar\' 1984 (Shenker 
was neck-deep in trouble over about $197 million in debts, including loans from 
various union pension funds, banks and thrifts, and unpaid taxes of about $66 
million), Kidwell first thought of his friend Wayne Newton as a potential buyer, 
he later told his Nevada attorney. But to his dismay he discovered that San 
Francisco loan broker J. William Oldenburg — whom Kidwell had introduced 
to Newton — had already convinced Newton to let Oldenburg broker the Dunes 
deal for him. Furious, Kidwell said he callea Anderson, to whom Eureka Federal 
had already made several agricultural loans, and suggested that Anderson buy 
the Dunes. Anderson had first entered the gambling world with his 1981 purchase 
of the Maxim Hotel and Casino in Las Vegas and his 1982 purchase of the 
Station House hotel-casino in Tonopah, Nevada. 

Anderson agreed. Eureka Federal was willing to put up the $25 million 
letter of credit (a guarantee to loan on demand) that would be required to swing 
the deal. In the meantime an option had to be acquired to ace out Oldenburg 
and Newton. Kidwell called San Antonio loan broker John Lapaglia for help 
with that end of the deal. 

In the end the Kidwell/Anderson team beat out the Oldenburg/Newton team 
when those negotiating the Dunes sale said they preferred a letter of credit from 
a federally insured institution (Eureka Federal) to Oldenburg's financing package, 
which an associate said was mostly personal notes and guarantees. When An- 
derson applied for the Dunes gaming license, he sailed through the rigorous 

Casino Federal •169 

Nevada State Gaming Control Board investigation. He assumed control of the 
Dunes from Shenker in 1984 but retained Shenker's son as a vice president and 
said Shenker himself would remain a board member." 

Some in Nevada's gaming industry wondered out loud if Anderson was "a 
beard" (fronting) for Shenker or for other interests that could not pass a Gaming 
Control Board muster. Such rumors had first surfaced a few months after An- 
derson had gotten control of the Maxim Hotel and Casino. The St. Louis Posf- 
Dispatch broke a story that claimed organized crime figures from St. Louis, 
Kansas City, Chicago, and Denver had tried unsuccessfully to purchase the 
Maxim in 1982. The story said that sources in Las Vegas and Denver had told 
them, following that failure, that they had "put together another attempt to 
penetrate legal gambling in Nevada." The story identified the mobsters involved 
in the alleged plot as being Tony Giordano of St. Louis, Eugene Smaldone of 
Denver, Joe "Joey Doves" Aiuppa of Chicago, and Nick Civella of Kansas City. 
State Gaming Control Board member Dale Askew characterized the story as 
"street talk" and said that the related rumors that John Anderson was acting as 
a front for organized crime were "thoroughly checked out and discounted at the 
time Mr. Anderson was licensed. We did not find a thing." 

Later the Las Vegas media reported that the Gaming Control Board was 
checking into Anderson's relationship with Eureka Federal Savings and Loan 
and Kenneth Kidwell. Following the Dunes deal, the Gaming Control Com- 
mission declared Eureka Federal an unacceptable source of funds for future 
casino acquisition. They gave no explanations for their action, but Kidwell 
complained in a letter to his attorney that the Dunes deal had caused him to 
become "trapped in Shenker's shadow." 

Kidwell wrote that it had surprised him to read in the newspapers that he 
had ties to Morris Shenker and various mobsters. He complained that even some 
of his Eureka Federal customers thought he was working with the mob. He said 
that John Anderson called him one day and asked if it were true that he (Kidwell) 
was "washing money for one of the families." 

Whatever problems there may have been at Eureka Federal Savings may 
never be known. Although the Nevada Gaming Control Commission was clearly 
concerned, the FHLBB was not. Even though some of the most prominent thrift 
looters we investigated were borrowers at Eureka Federal, even though one 
employee received phone threats just before she was to be deposed, even though 
a director told us he had been threatened by an officer, even though 170 loans 
were in default at Eureka Federal, regulators told us they had investigated Eureka 
Federal and found no evidence of fraud there. Mitchell Brown, a ubiquitous 
borrower who had also been co-owner of First National Bank of Marin in San 
Rafael, California, until he was forced out by regulators, felt differently.^'' Just 
before Brown was indicted for bank fraud in Oregon, according to investigators, 
he asked the U.S. attorney if he could cut a deal. He wanted blanket immunity. 


he said, for what he had done at Eureka Federal, but he would not tell regulators 
what he had done there (and they did not cut him a deal). His trial was pending 
as of this writing. 

Si.x months after John Anderson's successful purchase of the Dunes, in Mav 
1984, he submitted an application to the Gaming Control Board to purchase 
the Las Vegas Sundance Hotel, owned by M.B. "Moe" Daiitz, Mike Rapp's 
old Las Vegas buddy. The Gaming Gontrol Board announced they were going 
to conduct another thorough review of Anderson's finances, including his as- 
sociation with persons doing business with San Marino Savings and Loan in 
Southern California. According to published reports, Anderson suddenly with- 
drew his licensing application without explanation, (in referring to San Marino 
officials may have had Jack Bona in mind. See next casino story.) 

Like many other ambitious Anderson ventures, the Dunes turned out to be 
a giant money loser. Anderson put the Dunes into bankruptcy in September 
1985 for protection from creditors, who were owed $117 million. Anderson 
would eventually leave Eureka Federal Savings stuck with nearly S?2 million 
in his delinquent loans. A source close to the Eureka Federal Savings case said 
in late 1988 that Anderson was attempting to bring the loans current by making 
monthly payments of $500,000. 

According to media accounts, Anderson also defaulted on $22 million in 
loans from Crocker Bank and $2. 1 million borrowed from Aetna Life Insurance 
Company. He had $4? million in debts on his various real estate holdings and 
owed $68.6 million to Valley Bank of Nevada. After tapping out these sources 
Anderson headed north to Oregon, where authorities said loan broker Al Yarbrow 
helped him get $25 million in loans out of State Savings of Corvallis. Yarbrow 
also introduced Anderson to Charles Bazarian and Anderson later borrowed 
money through Bazarian's CB Financial. We would find Anderson's footprints 
at Vernon Savings in Dallas as well. (See Texas chapters.) 

Jack Bona and his partner, Frank J. Domingues, got $200 million in loans 
from San Marino Savings and Loan in San Marino, California,-' in ten months, 
even though tax records showed that three years earlier they had reported com- 
bined incomes of less than $30,000.-'* (Remember that the next time a banker 
tells you you don't earn enough to qualif\' for a $9,000 car loan.) The plan they 
submitted to San Marino was to convert apartment units to condos and sell them 
as tax-shelter rentals to investors in high income-tax brackets. When San Marino 
failed in December 1984-" regulators charged that the properties on which San 
Marino lent Bona and Domingues $200 million were worth onl>' about $100 
million. Most of the loans were in deep default, and the properhes turned 
out to be in such bad neighborhoods in Dallas and Los Angeles that even an 
internal memorandum at San Marino .showed that the thrift's staff referred to 

Casino Federal "171 

tliem as "the Zulu projects." A California thrift director who went to Texas to 
look at the condos for himself sent back a memo with this discouraging word: 
"They are NO'I' convertible [into condos) except to a BLIND investor." Reg- 
ulators claimed Bona and Domingues pocketed up to $50 million for themselves 
on these projects. Domingues told reporters that they made only about $10 

Remarkably, even as regulators were wringing their hands over what Bona 
and Domingues had done to San Marino Savings, the two new millionaires 
were buying their own savings and loan nearby. South Bay Savings. "Apparently 
the left hand didn't know what the right hand was doing," deputy California 
Savings and Loan Commissioner William Davis said later (he became deputy 
commissioner after the South Bay affair). The San Diego Union reported that 
Domingues said he would never allow his thrift, South Bay, to make the kinds 
of loans that San Marino had made to him and Bona. Be that as it may regulators 
later revealed that the day the two men bought South Bay, they had the thrift 
loan them $6 million."' 

Shortly after opening South Bay, Jack Bona" split with Domingues. He sold 
out his share in South Bay to Domingues" and in 198? purchased another kind 
of financial institution, Morris Shenker's troubled 664-room Atlantic City Dunes 
Hotel and Casino project. Shenker had begun the project just before defaulting 
on millions in loans from union pension funds. Now it was little more than a 
rusting abstract sculpture of I-beams in the middle of town. Shenker sold the 
project to Bona shortly before John B. Anderson bought Shenker out at the Las 
Vegas Dunes. Bona kept the Atlantic City Dunes for a couple of years, during 
which time he added a few more millions in loans to the project's crushing 
debt," and then he defaulted and filed for bankruptcy in 1985. 

The Dunes was put up for sale by the bankruptcy trustee and sold in 1988 
to Royale Group Ltd., run since 1981 by Leonard Pelullo. We remembered 
Pelullo because his name had shown up without explanation in documents 
regulators had seized from Consolidated Savings. The handsome, swarthy Pe- 
lullo, who was 37 in 1988, worked out of an office in the Carlyle Hotel in 
Miami Beach's Art Deco district. BusinessWeek reported that he described him- 
self as a "workout" specialist, a consultant who helped companies drowning in 
debt. The still-unbuilt Atlantic City Dunes project certainly qualified. 

But Pelullo may have had a darker side. BusinessWeek also reported that he 
had recently worked under the alias Bob Paris because, Pelullo reportedly said, 
he wanted to avoid drawing attention to a New Jersey State Commission of 
Investigation report on boxing that described him as "a key organized crime 
associate from Philadelphia." Pelullo denied any ties to the mob. 

In June 1989 a Cincinnati grand jury handed down an indictment against 
Pelullo and David A. Friedmann, a Houston businessman who from 1983 to 
1985 was owner and CEO of Savings One, a thrift in Gahanna, Ohio (Mario 


Renda and Martin Schwimmer attempted to purchase Savings One in 1983). 
The indictment charged the two men with conspiring to obtain loans from the 
thrift that were used for purposes other than stated on the loan application. The 
indictment also charged that Pelullo paid Friedmann $145,UOO in kickbacks for 
arranging the loans. Pelullo said the money was pre-paid interest on a loan 
extension he expected to receive. The case was pending at this writing. 

We had run into the casino connection at Consolidated as well. One of 
Consolidated Saving's problem loans, regulators claimed, was a $614,311 loan 
to Robert Shearer and Llewellyn Mowery for refurbishing the Treasury Hotel 
and Casino in Las Vegas. Shearer and Mowcrv' refused to repay the loan, 
according to regulators, unless Consolidated loaned them $3 million more. 

Consolidated Saving's owner, Robert Ferrante, got into the casino act per- 
sonally, court records showed, when he and Mario Renda teamed up for a casino 
project in Puerto Rico that they called the Palace Hotel and Casino.'^ After 
Consolidated failed and Renda found himself enmeshed in all manner of crim- 
inal and civil difficulty, the Palace Casino was allowed to go into bankruptcy 
and Las Vegas newspapers reported that the project was purchased out of bank- 
ruptcy by the Pratt Hotel chain, a division of Southmark, Inc.. a Dallas-based 
conglomerate that also owned San Jacinto Savings and Loan in Houston (see 
Chapter 21). 

By far the most frequent casino connection we ran into at failed thrifts around 
the country was the Las Vegas-based Dunes Hotels and Casinos company and 
its chairman, Morris Shenker. Shenker, born in Russia in 1907, had been an 
attorney in St. Louis since 1932. He first came to national attention in the early 
1950s during the congressional hearings of the Kefauver committee, which 
investigated the influence of organized crime in interstate commerce. Twenty 
years later Life magazine detailed his alleged mob ties in an expose of a former 
St. Louis mayor (by then, ironically, Shenker had been appointed chairman of 
the St. Louis Commission on Crime and Law Enforcement, a position he held 
from 1969 to 1972). In 1975 Penthouse magazine said Shenker was under in- 
vestigation by a federal strike force and grand jury in St. Louis and added, "His 
Byzantine financial maneuvering astounds investigators in and out of govern- 

The source of Shenker's power appeared to be his lengthy and well-publicized 
relationship as chief attorney and confidant of Teamster union president Jimmy 
Hoffa. Hoffa was Teamster boss from 1957 until he went to prison in 1967, and 
he continued to run the union from prison for several years. (He was released 

Casino Federal • ^73 

from prison in 1971 and disappeared in 1975 as lie was attempting to regain 
control of the Teamsters. Authorities believe he was murdered.) Ihe President's 
1986 Commission on Organized Crime reported that the Teamsters, the nation's 
largest union, had been ■'firmly under the influence of organized crime since 
the 1950s." In 1989 the FBI released material collected for the FBI by Teamster 
president Jackie Prcsser during the nine years he was an FBI informant, until 
he died in 1988 of brain cancer. The documents showed a union dominated 
by organized crime and corruption. 

As Teamster leader, Hoffa controlled the massive ($400 million in 1967, 
$1.6 billion in 1977) Teamsters' Central States Pension F'und. He directed that 
millions of the fund's dollars be loaned to associates and mobsters, and over the 
years the fund became, as autiior Steven Brill wrote in The Teamsters, "a special 
bank where loans depended almost always on the right kickbacks or the right 
organized crime connections." By 1974 Shenker had more than $100 million 
in loans from the fund, for the Las Vegas Dunes and other properties, according 
to Brill. The President's 1986 Commission on Organized Crime said that Shenker 
received the largest single loan ever made by the fund, a portion of which had 
never been repaid. With that access to millions came, apparently, tremendous 

Hoffa pioneered the use of Teamster pension funds to finance casinos in 
1960. The Penthouse piece said Michael Rapp's buddy Moe Dalitz helped per- 
suade Hoffa to finance Nevada hotels and casinos." In Las Vegas the Teamsters 
at one time backed Dalitz's Desert Inn, Circus Circus, the Fremont, the Lodestar, 
the Plaza Towers, the Stardust, the Landmark Hotel, the Four Queens, the 
Aladdin, and Caesar's Palace; in Lake Tahoe, the King's Castle, the Lake Tahoe, 
and the Sierra Tahoe; in Riverside, the Riverside; and in Overton, the Echo 
Bay, according to investigative reporters Jonathan Kwitny and Steven Brill. 
Presser told the FBI that profits from Las Vegas casinos were illegally skimmed 
and mob couriers took the cash away in suitcases. 

Shenker got control of the Las Vegas Dunes with the promise of a $40 
million advance from the Teamsters' Fund, and we came across him or the 
Dunes numerous times in our investigation. Erv Hansen at Centennial gambled 
at the Dunes regularly, reportedly sometimes dropping $10,000 at the roulette 
table in a single night. Norman B. Jenson had been a Shenker business associate. 
Shenker made the Dunes a hospitable place for thrift officials and even occa- 
sionally provided suites where deals could be cut, as when Winkler, Daily, and 
Russo met there to formalize their Indian Springs State Bank project. The Dunes 
Hotel and Casino and several of Shenker's associates received loans from Indian 
Springs State Bank. Jack Bona bought the Atlantic City Dunes from Shenker 
and John Anderson bought the Las Vegas Dunes, both using S&L credit, when 
Shenker was in deep financial trouble. Shenker was mentioned in Renda's 1981 


desk diary. Nevada gaming documents revealed Philip Schwab was a Shenker 
associate, as was Eureka Federal Savings President Kenneth Kidwell, who also 
knew Jackie Presser well. 

When Sun Savings in San Diego failed in July 1986, court documents 
showed that the president, Daniel W. Dierdorff, had loaned Shenker almost $2 
million, which he never repaid. Shenker often entertained Dierdorff at the 
Dunes, regulators said, and Dierdorff used Shenker's jet for gambling trips to 
the Dunes and other personal trips. Shenker maintained a $25,000 line of credit 
in Dierdorffs name at the Dunes. Also around that time Dierdorff opened an 
account at another savings and loan under an assumed name and deposited 
more than $200,000 to that account in 1983. Dierdorff later pleaded guilty to 
two felony bank fraud charges, but the source of the money remained a mystery. 
He was sentenced to eight years in prison in 1989. 

Why would Shenker, who appeared to have a direct pipeline to limitless 
Teamster pension-fund money, be so solicitous of his connections within the 
SdrL industry? Becau,se in 1983 the Labor Department finally wrestled control 
of the Teamster Central States Pension Fund away from the mob. With its 
immense appetite for money, Shenker's empire was in crisis. How serendipitous 
for Shenker, then, that at that ver>' moment Congress was obligingly deregulating 
savings and loans. Without missing a beat Shenker swung into his savings and 
loan mode, and when he had to sell the Dunes in 1984 (a massive court judgment 
against him, on behalf of a pension fund he owed millions, forced him into 
bankruptcy), his hunt for fresh money intensified. Legitimate bankers wouldn't 
loan to him, so he needed insiders like Dierdorff, over whom he had some 
control. Better yet, suppose he could use a beard to front for him and take control 
of a thrift? That's apparently when he thought of Charles Bazarian, a heav>' 
gambler at the Dunes (his 1987 bankruptcy filing revealed he owed the Dunes 

In early 1985 Bazarian was buying stock in savings and loans as a way to 
meet lenders. (Not until his indictment in September 1986 at Florida Center 
Bank with Rapp and Renda did his wheeling and dealing begin to catch up with 
him. ) He bought 9.9 percent of Freedom Savings in Tampa (the maximum that 
could be acquired without regulatory approval), where he met Philip Schwab. 
A month later he bought 9.9 percent of Bloomfield Savings and Loan (for a 
reported $731,000) in a ritzy suburb of Detroit, and two weeks later, in early 
April 1985, he showed up there with his hand out for a loan. He didn't come 
alone, however. With him were Shenker and loan broker Al Yarbrow. Bazarian 
later said in court depositions and in conversations with acquaintances that the 
Bloomfield connection was Shenker's idea. He said Shenker had a friend with 
connections to the chairman of Bloomfield, and Shenker wanted Bazarian to 
get control of the thrift, make Shenker's friend chief execuhve officer, and 
approve loans to Shenker. 

Casino Federal ■ 1 75 

A former Bloomficid official told Detroit Free Press reporter Bernic Shcl- 
kim, who dug up much of the Bloomfield story, that Bazarian's approach 
at the meeting was that he was a partner in the thrift, he wanted to help it 
make money, and one important step it should take was to loan to his com- 
pany in Oklahoma City. The former thrift official said Bazarian was "loud 
and aggressive — a pound-the-table type guy" whose message was, "Here's 
what you should do, you dummies." The thrift's chairman e\idently agreed, 
saying in a memo to thrift directors that Bazarian would bring "the huge 
loan demand and deep pocket which we have been trying to find." 

Bank records show that on April 22 the thrift approved a $15 million loan 
for Bazarian {the loans-to-one-borrower limit at Bloomfield at that time was $3. 5 
million) backed primarily by real estate that regulators later said turned out to 
be overappraised or already pledged as collateral for another loan someplace 
else. Court records showed Shenker was to share in a finder's fee for taking 
Bazarian to Bloomfield. 

The new president at Bloomfield (promoted to the position in February), 
unfortunately for Shenker, was a career banker who vehemently opposed the 
Bazarian loan, and within two weeks the thrift was trying, without success, to 
get its money back." By late 1988 Bloomfield was hopelessly insolvent and 
regulators seized control. 

Shenker's assault on the thrift industry was massive. No one will ever know 
its true extent. As this book was going to press, we learned that Shenker had 
tried to borrow from Freedom Savings in Tampa, and a highly placed law- 
enforcement official told us he had just discovered that Shenker had borrowed 
from Liberty Federal Savings in Leesburg, Louisiana (Liberty later collapsed), 
a thrift with connections to an incestuous Texas banking network we discuss 
later in this book. 

In 1988 Shenker, 82, suffered two heart attacks, and when we tried to contact 
him at his St. Louis office, a spokeswoman told us he was in poor health in a 
St. Louis hospital. In February 1989 he was indicted in Nevada on two counts: 
conspiracy to commit bankruptcy fraud (by concealing money from creditors) 
and conspiracy to defraud the IRS. A Nevada Gaming Control Board investigator 
told us that when he had investigated Shenker years ago he found him to be "a 
financial Svengali with over 105 corporations between which he was shuttling 

In 1982 Congress passed the Carn-St Germain Act, which allowed thrifts 
to begin to invest in areas other than home mortgages so they could diversify 
their portfolios of investments and protect themselves against swings in interest 
rates and other market fluctuations. No one suggested that casinos were a great 
hedge against inflation, deflation, or stagnation, but within months after thrifts 


were deregulated, millions of dollars in loans were flowing into casino operations. 
Casinos also used junk bonds, many arranged through Drexel Burnham Lambert, 
to finance their acquisitions and expansion, and some of those junk bonds, we 
discovered, ended up in the portfolios of troubled thrifts who bought them hoping 
that their potentially high returns would pull their thrifts out of trouble.'" 

"These guys are going to have a rude awakening when the day comes that 
junk bonds live up to their name," one thrift analyst told us. 

Of all the thrift/casino deals we discovered, not a single one resulted in 
anything but substantial losses for the thrifts. Like the union pyension funds that 
came before them, thrifts were always the losers in the casino game, while the 
high rollers — some with long-standing mob ties — emerged unscathed. The ca- 
sino connection was a financial black hole that sucked millions in insured deposits 
off to who knows where. 


Gray; Stockman^ and the 

Red Baron 

In the suninier of 1984 swindlers like Mike Rapp were looting thrifts like Flushing 
Federal with wild abandon, unobserved and unobstructed. But some isolated 
cases of abuse had begun to surface, enough to convince FHLBB Chairman Ed 
Gray that deregulation had been carried too far. No sooner had Empire Savings 
in Dallas collapsed in March 1984 than the problems at San Marino Savings 
in Southern California came to his attention' (the failure of the two thrifts cost 
the FSLIC an estimated total of $600 million), and on their heels came word 
from the San Francisco FHLB to brace for more of the same. At least a dozen 
more San Marinos were in various stages of insolvency, they told Gray, and 
Gray's people in Texas were sending back the same message. In the first half of 
1984, Gray faced one crisis after another. 

In April the industry got unwanted publicity when the San Francisco Ex- 
aminer reported on what it said was a land flip orchestrated by San Francisco 
loan broker J. William Oldenburg at State Savings of Salt Lake City. Reportedly 
Oldenburg bought 363 acres of land in Richmond, California, in 1977 for 
$874,000 (he actually paid only $80,000 in down payment, the paper reported). 
In 1979 he hired an appraiser who appraised the land at $32.5 million. Just a 
little over two years later, in 1982, the same appraiser decided the land was 
worth $83. 5 million. In 1983 Oldenburg bought State Savings for $10. 5 million. 
In 1984 he sold the Richmond property to State Savings for $55 million, the 
Examiner reported.- Oldenburg resigned as chairman of State soon after a searing 
article appeared in The Wall Street Journal in June 1984.' 

On July 31a congressional committee released a report that made public 
for the first time the causes for the collapse in March of Empire Savings near 
Dallas. Pressure on Gray to do something about the emerging problem was 
building. But do what? The growing number of insolvencies presented Gray 
with a heads-I-win, tails-you-lose dilemma. If he ordered all the insolvent in- 



stitutions closed, as the law required, the FSLIC would be liable for billions of 
dollars in losses. If the dying thrifts were allowed to continue operating, they 
would only sink deeper into the red. Cira)- began to gear up for an extended 
battle to get the thrift industr\' back under control and to try to develop a plan 
for responding to the emerging crisis. 

The last thing he needed then was a run-in with Charlie Knapp. Knapp was 
dashingly handsome, a young, self-styled financial visionary whose gold-plated 
faucets, in the lavatory of his company's $14 million Lear jet, have become part 
of the lore of those go-go S&L years. He ran Financial Corporation of America 
(FCA) in Irvine, California, south of Los Angeles. FCA in turn owned American 
Savings and Loan of Stockton, California, which was at the time the largest 
thrift association in the country. FCA was one of Gray's rapidly emerging head- 
aches. The company was on a growth cunc that pointed straight up. in just 
one year, 1983 to 1984, VC\ had grown from an already staggering $22 billion 
in assets to an unbelievable $32 billion. Regulators said Knapp used brokered 
deposits and jumbo CDs sold through his own money desk"* to invest in fixed- 
rate mortgages and sophisticated hedging instruments that regulators and the 
Securities and Exchange Commission had a very difficult time understanding 
or evaluating. They couldn't see how^ FCA was coming up with the profits it 
was reporting while at the same time it was drowning in repossessed real estate. 

FCA had invested billions in old, fixed-rate loans at the very time the rest 
of the industry was rushing to safe adjustable-rate loans. And court documents 
later revealed that FCA had its share of risky commercial development projects 
in California and Texas as well. Delinquencies piled up and regulators said FCA 
was making outrageous deals in order to sell the properties it had already had 
to repossess. At one time, Knapp told us, he had 300 people working in FCA's 
repossessed properties department. ^ 

Among Knapp 's borrowers was the ubiquitous Morris Shenker. FCA had 
loaned millions to the Las Vegas-based Dunes Hotels and Casinos when Shenker 
was chairman. (When Shenker ran into financial woes. FCA was partly bailed 
out by Jack Bona, who purchased the Atlantic City Dunes project in 1983.* 
However, as of October 198'> FCA was reportedly the Dunes' largest creditor 
with a $51 million mortgage on the Las Vegas Dunes' building.) 

Another borrower was Leonard Pelullo. Pelullo and American Savings and 
Loan eventually became entangled in litigation over a $13 million mortgage. 
(The Atlantic City Press reported that circumstances surrounding Pelullo's busi- 
ness relationship with American prompted a grand jury investigation in 1986 
but no indictments resulted." In 1988 Pelullo's Royale Group Ltd. bought the 
Atlantic City Dunes.) 

Gray didn't like Charlie Knapp's way of doing business and wanted him out 
of the thrift industry. If FCA failed, the weight of its $32 billion portfolio would 
pull the FSLIC fund down in one swoop. 

Gray, Stockman, and the Red Baron • 1 79 

From Washington, Gray called Knapp at his offices in Irvine, California, 
and said lie wanted to see him in Washington as soon as possible. Knapp flew 
straight to Washington to confront the chairman on his own ground. 

"Mr. Gray will see you now," the receptionist told Knapp, a dapper dresser 
nicknamed "the Red Baron" by his friends because he flew a vintage P-38 World 
War II fighter. But this was one dogfight Knapp wasn't going to win. The meeting 
between Gray and Knapp began at 2:15 p.m. and Gray had another meeting 
scheduled for 2:30 that he could not miss. Gray told us he read Knapp the riot 
act, quoting chapter and verse on everything he disliked about FCA's operations. 
He accused Knapp of running FCA in an "unsafe and unsound manner." The 
phrase was a provocative one and Knapp could not miss its significance — it was 
the very phrase the FSLIC used when it closed thrifts and sued former owners 
for the losses. 

"Because of your irresponsible actions," Gray said he continued, "you've 
placed in jeopardy the entire savings and loan industry, Mr. Knapp, and I'll do 
everything in my power to make sure you are removed from this industry. I'm 
putting you on notice." Gray looked down at his watch. It was 2:30, and he was 
a busy man. 

Knapp remembered the meeting a little differently. He told us Gray greeted 
him with, "I understand that your loan portfolio is not sound." 

Knapp said he asked Gray, "What do you base that on?" 

Gray pulled out of his shirt pocket an article from the business section of 
The New York Times and started reading. As Knapp later recalled it to us, "I 
just threw up my hands and said, 'The hell with this, I've gotta get out of here.' 
I couldn't get out of there fast enough." 

Regardless of the version you believe, it was clear that the normally flam- 
boyant, self-assured Knapp was caught by surprise by the vigor of Gray's attack. 
This was not the dopey "Mr. Ed" his friends in the industry had told him to 
expect. The Red Baron had been shot down in flames. 

"I fly all the way from California and the guy gives me 1 5 minutes and 
shows me the goddamn door," Knapp told us later. 

Shocked, Knapp returned to California, formulated a plan, and called Gray 
to make a proposal. This time Gray had to listen because FCA was too big to 
shut down, no matter how rotten it may have been. Somehow Gray had to keep 
the company going, like a ward of the FHLBB, until its problem assets could 
be disposed of in an orderly manner over a long period of time. Knapp knew 
the bind that Gray was in and offered him a deal. Knapp agreed to leave 
voluntarily on two conditions: first, that he be allowed to select his successor, 
pending Bank Board approval, and, second, that Gray agree to a $2 million 
golden parachute for Knapp. Gray agreed. 

Knapp hung up the phone and called Washington again. This time he 
phoned the Office of Management and Budget. 

180 • INSIDE |OB 

"David Stockman, please. Tell him Charlie Knapp's on the line." 

Knapp told us he called Stockman^ and said that Gray had forced him out 
of FCA. Knapp asked Stockman if he would be interested in the job. Stockman 
had been President Ronald Reagan's spokesman on budget matters since Reagan 
took office in 1981, and he had made it known he was getting tired of taking 
the heat — outspoken and opinionated, he had attracted a lot of press coverage. 
He also may have been getting tired of taking trips to the Oval Office woodshed 
whenever he "misspoke." The prospect of running a $32 billion company must 
have seemed an easy matter after what he'd been through. He agreed to Knapp's 
proposal. Knapp told Stockman to get Ed Gray's approval. Stockman called 

"Gome on over, David," Gray said. 

Within 30 minutes Stockman had arrived at Gray's office. Gray told us 
Stockman said he had talked to Knapp about the FCA job and was interested. 
He said he was tired of Washington and wanted to return to the private sector, 
and the FCA job was an attractive challenge. Gray listened patiently, thinking 
to himself that Knapp must have offered Stockman a lot of money to take the 
job and to act as Knapp's mouthpiece. But Gray let Stockman present his case. 
Gray's friend and the FHLBB's general counsel. Norm Raiden, sat quietly in a 
corner chair. Finally Gray spoke up. Out of curiosity he asked, "How soon 
could you leave your job at OMB, David?" 

"Five days," Stockman shot back. But Gray had already made up his mind. 

"I understand you're a nice man and a quick study, David, but you've never 
operated a thrift before. I'm sorry, but I've already lined up Bill Popejoy for the 
job.'"^ A half hour after Stockman left Gray's office, James Baker, the president's 
chief of staff, phoned and Gray told us he asked angrily: 

"Why are you trying to hire Stockman away from us? There's an election 
coming up. We need him." 

"1 didn't," Gray answered. "He wanted the job and I suggested he forget all 
about it." Baker hung up the phone. Later that day Stockman called Gray and 
said he didn't want the job anyway. He was going to stay at OMB. (As of early 
1989 Knapp had not been charged criminally or civilly in connection with FCA's 
huge insolvency. However, FCA's troubles cost the FSLIC over $2 billion and 
spawned nearly 1,200 separate lawsuits, many naming Knapp, and he had sued 
FCA. By press time about half the suits had been settled, ruled on, or dismissed.) 

As Gray mapped his strategy for stopping the abuses at thrifts and dealing 
with the damage already done, he realized he could not do the job with regu- 
lations alone. He would need help from Congress. He knew he was pushing a 
stick into a beehive, but he felt the situation was deteriorating so fast that he 
had little choice. To get Congress to act he would have to have public support. 

Gray, Stockman, and the Red Baron • 181 

so he took his hattic pubhc. In speech after speech Cray attacked some of the 
elements he identified as being at tlie root of the indiistr\''s problems. Among 
them were: brokered deposits, risky lending, direct investments,'" and inaccurate 
appraisals. He proposed restrictions, and he even introduced the idea of a risk- 
based premium program that would require individual thrifts to pay special 
assessments to the FSLIC if they engaged in risky behavior. 

His candor produced a vigorous counterattack in Washington. Gray claimed 
Don Regan had the Treasury Department" back a bill in Congress that would 
actually further deregulate the thrift industry. Gray was appalled and vigorously 
opposed the bill, it was defeated. Score one for Gray. 

A short time later. Gray believes, Don Regan exacted his revenge. On 
September 13, 1984, Regan spoke on the state of the economy to a convention 
of mortgage executives in Washington. At the news conference that followed, 
Stan Strachan, editor of the National Thrift News, asked Regan if the Treasury 
would guarantee losses at FCA in the event of a run on the company by de- 
positors. After all, Strachan reminded Regan, Treasury had done just that a few 
years earlier during a run on Continental Illinois bank in Chicago. 

"No," Regan shot back. Pressed by Strachan, Regan categorically ruled out 
any kind of Treasury backing for FCA. That public statement created exactly 
the kind of turmoil Gray had been trying to avoid by moving slowly on the FCA 
matter. He had eased Knapp out and Popejoy in with as little fanfare as possible. 
So far his strategy had worked — until Don Regan's remarks. The next day there 
was a run on FCA and $400 million in deposits walked (or ran) out the door as 
customers and deposit brokers rushed to remove their money. It was the largest 
one-day run in thrift history, and Ed Gray was furious at Regan. Regan's careless 
remarks had been devastating to Gray's FCA rehabilitation program. Gray shot 
off an angry letter to Regan, asking him to cheek with the FHLBB the next time 
he planned to speak out like that. 

Regan replied with an angry letter of his own in which he said, "I was 
surprised and frankly displeased by your letter. . . . Candidly, I do not have to 
be reminded of my responsibilities in areas of concern to you or, for that matter, 
any of the other areas of government in which economics and finance play a 

Soon Regan had another opportunity to throw stumbling blocks in Ed Gray's 
path. To repair the damage done at FCA by the massive outflow of deposits in 
the wake of Regan's remarks. Gray turned to brokered deposits as a quick fix. 
Ironically, Gray, the very man who was death on brokered deposits, was now 
turning to them to buy time. For help he approached his predecessor at the 
Bank Board, Richard Pratt, now an executive with Merrill Lynch, and Pratt 
agreed to have Merrill Lynch place $1 billion in deposits with FCA within days. 
But he soon called Gray back with the news that he'd been overruled by his 
superiors at Merrill Lynch and the deal was off. Gray was forced to raise the 


money from other brokerage houses. Later Pratt told Gray privately that Don 
Regan had personally intervened at Merrill Lynch to kill the deal. It was almost 
as if Regan were taunting Gray for his opposition to brokered deposits. Gray 
thought Regan was trying to get back at him for Gray's suggestion that Regan 
check with him before commenting publicK about S&'L matters.'- Regan, who 
had promised he would not involve himself with matters relating to his former 
employer Merrill Lynch after he joined the Reagan cabinet, denied intervening 
with Merrill Lynch about the $1 billion in brokered deposits for FCA. Pratt 
declined to comment. 

After Gray's brokcred-deposit regulation was rejected by a federal court, 
which ruled that only Congress could make such a prohibition. Gray decided 
that if he couldn't limit brokered deposits, he'd better limit what thrifts did with 
those federally insured deposits. At every insolvent S&L, Gray found both ex- 
cessive brokered deposits and risky direct investments. In Gray's view thrifts 
chartered in states with liberal thrift regulations were using federally insured 
deposits to take far too many risks. '^ The thrift industry was turning into a crap 
shoot, with the bets insured by the FSLIC. Gray thought that was wrong, and 
he made it known that his next move would be to draft new regulations that 
would curb direct investments by FSLIC-insured state thrifts''' and limit thrifts' 

"It had to stop," he was telling everyone who would listen. S&Ls were 
padding their financial statements with too many direct investments that seemed 
on the books to be worth millions but whose qualit\' couldn't really be determined 
until the project was completed. If the project was a ripoff, no one would know 
until it was too late. 

Gray had first proposed a new direct investment regulation in May 1984. 
In early December 1984, shortly before he actually issued the new regulation. 
Gray said Bill O'Gonnell of the U.S. League of Savings Institutions phoned and 
pleaded with him not to go through with it. 

"If he had been at Gray's office, you can guarantee that O'Gonnell would've 
been down on his hands and knees," an aide said later. 

O'Gonnell denies he asked Gray to kill the whole regulation, but only to 
modify it. Whatever the case. Gray was unmoved. 

In January the regulation was finally enacted, to go into effect in March. 
In general it would limit direct investments to just 10 percent of a thrift's total 
assets,"" and it would also limit a thrift's rate of growth to 25 percent a year.'' 
Some thrifts had been growing at rates of 100 to 500 percent a year.'* 

Gray says that the U.S. League again tried to kill the regulation. O'Gonnell 
remembers events differently, repeating that, rather than wanting to kill Gray's 
growth restrictions, the League had simply wanted them modified and calling 

Gray, Stockman, and the Red Baron • 1 83 

Gray's version "overkill." Gray says "nonsense." I Ic believes O'Connell is trying 
to rewrite history. 

"During the late afternoon of the day before both of these regs [the growth 
regulation and the direct investment regulation] were proposed in open hearing 
of the Bank Board, Mr. O'Connell called me," Gray recalled. "My recollection 
is that the calls came in at around S to 6 p.m. Mr. O'Connell begged me to 
not go through with the growth regulation, not to propose it the next day, and 
he said if I did so my career would be ruined if 1 ever decided to go back to the 
thrift industr\. The call was a long one, as I recall, probably ?0 to 40 minutes. 
I told him that if 1 had to be the son-of-a-bitch to do it so be it. It would be 

Regarding the direct investment regulation. Gray said it was only after 
the regulation was adopted by the Board that the U.S. League "grudgingly" 
supported it. 

As 1985 dawned it was beginning to appear to Ed Gray in Washington that 
Texas was especially out of control. Gray's shorthanded and underpaid examiners 
were coming in from the field with stories about Texas thrift owners and managers 
that made J. R. Ewing look like a minister. They told Gray about thrift board 
meetings attended by hookers whose services were paid for by the thrift, chartered 
jet-set parties to Las Vegas, gala excursions to Europe, luxurious yachts, ocean- 
front mansions, and Rolls-Royces — princely life-styles built on mountains of 
bad loans and bad investments. The state's long-standing liberal thrift and bank- 
ing practices, the oil and real estate booms of the late 1970s, and the state's 
entrepreneurial, wild-cat business traditions had all combined to make Texas a 
hothouse for deregulated thrifts, and the signs of abuse were starting to show. 
In the newly deregulated environment new thrifts had sprouted throughout Texas 
like rye grass after a spring rain. Old, long-established thrifts were snatched up 
by young speculators eager for the opportunity to wheel and deal with insured 
deposits. Even out-of-state thrifts, many from California, opened loan offices in 
Texas hoping to catch a ride on the Texas wave. 

Within a year of Garn-St Germain's passage Texas was embroiled in a 
construction-loan feeding frenzy. Acquisition and Development Loans (ADLs) 
and Acquisition, Development, and Construction Loans (ADCs), for commer- 
cial projects, were the main-line products. Home loans went begging. The 
money, in large part, flowed into construction. Yet thrifb were not doing suf- 
ficient market surveys to see if the marketplace could absorb the new office 
buildings and condos, and they were not coordinating with other thrifts to make 
sure they weren't all going to flood the market at the same time with the same 
kinds of projects. In Texas in the early 1980s the emphasis was on building, 
and the future would take care of itself because the boom would never end. 


Building permits in Texas increased from S4. 5 billion in 1976 to about $17 
billion in 198'?. 

Texas thrifts lived only for today: today's deals, today's profits, today's kick- 
backs. By 1985 the Dallas and Houston skylines were filled with what locals 
began to refer to as "see-through office buildings." So much commercial con- 
struction had been financed by thrifts that it far outstripped the local market 
demand, and glass skyscrapers stood empty. There were so many unsold condos 
littering Houston and Dallas and their suburbs that a favorite joke among lenders 
went: "Whafs the difference between \'.D. and condominiums?" The answer: 
"You can get rid of \'.D." 

With supply vastly exceeding demand in 1985, many Texas thrifts kept from 
going under only by turning more deals and inflating their financial statements 
with more fees and up-front interest. Their portfolios became little more than 
huge pyramid schemes, Ponzis, that required constant trades, refinancings, 
swaps, participations, and loans on yet more new projects. They had to take in 
more brokered deposits to fund more loans so it would appear that they were 
making more profit, even though the loans were risky (risky loans carried the 
potential for the highest profits — and losses). As a result Texas thrifts grew at an 
astronomical rate. In 1984 and 1985 they grew three times faster than the national 
average.'" As long as the S&Ls could keep pedaling, they wouldn't fall. But 
ever\' day that passed they had to pedal faster and faster to maintain the illusion 
that they were moving forward. Gra\'s proposed limits on direct investments 
and growth were going to be very unpopular with thrift owners in Texas — men 
like Don Dixon, who owned Vernon Savings and Loan, headquartered in Dallas. 
By 1985 Don Dixon was living like a king, and Gray's new rules threatened his 

Don Dixon, his petite blond wife, Dana, clinging tightly to his arm, strode 
proudly toward the front of the crowd of 40,000 assembled in the piazza in front 
of St. Peter's Basilica in the Vatican. Pope John Paul II, dressed entirely in 
white, had just made his weekly Wednesday address in six languages and was 
now descending the white throne to mingle with the special guests seated around 
the platform. 

The Bishop of San Diego, the Reverend Leo T. Maher, was hosting the 
Dixons for their personal meeting with the Pope. Dixon was in his late forties. 
Expensively dressed, and with collar-length gray curls around a tanned face, he 
stood out as a businessman in the crowd of worshipers. He had a drooping 
mustache and beady eyes that could look warm and trustworthy or calculating 
and condescending. He had the air of a let's-shake-on-it kind of guy. 

Dixon noted the grandeur of the 300-year-old piazza surrounded by Gian 
Lorenzo Bernini's grand colonnade. It is one of the most awesome places on 

Gray, Stockman, and the Red Baron '185 

earth, and Dixon noticed that the normally loquacious Dana was uncharacter- 
istically silent. As the Pope neared, Dixon, too, felt the uniqueness of the 
moment. He was not a Catholic, and he had an arrogant sclf-confidcncc, but 
even he could not resist this Pope's stature and personal power. 

"I was very well aware of everything 1 said and that I was in the presence of 
someone very special," he would later recall. 

Pope John Paul II greeted the Dixons with a handshake and his characteristic 
off-to-one-side nod. Dixon thanked the Pope for the opportunity to meet with 
him and presented him with a gift he had brought for the occasion, a $40,000 
Olaf Wieghorst original oil painting of an Indian on horseback, "Night Sentry." 
The Pope admired the painting and said it would hang in the Vatican Museum. 
Dixon told the Pope how much that meant to him. What Don failed to tell His 
Holiness was that the painting was not his to give. He had "borrowed" it from 
Vernon Savings and Loan back home.''' 

After their stop at the Vatican the Dixons continued their European fling 
with visits to Bulgari and Guzzi spas. They stayed at the finest European hotels, 
such as the Grosvenor House in London, the Hotel Ritz in Madrid, and the 
Bristol Hotel in Paris, and while in the neighborhood they stopped by the Palais 
de Margaux in Bordeaux, a chateau Dixon and some partners were converting 
into a restaurant and hotel. Then it was time to head for home. The Dixons 
made their May 1985 European jaunt in Vernon Savings' tri-jet Falcon 50 and, 
regulators later discovered, charged the trip's expenses on Vernon's tab. 

Flying into Dallas on the last leg of their trip, the Dixon entourage looked 
out of the windows of their private jet at the city where the Dixons had made 
their fortune. Dallas, the eighth largest city in the United States, was an exciting 
town of soaring glass buildings, wild night spots, and businessmen in gray suits 
and cowboy boots. Business had traditionally been done differently in Dallas 
than in the rest of the country — on gambling instincts, eternal optimism, and 
the myth of the reliability of a Texas man's word. In the early 1980s the brash 
city vibrated with the pulse of money being pumped into the local economy 
from a booming oil business and mushrooming real estate speculation. 

Don and Dana must have enjoyed the view as their private jet swooped 
down over North Dallas, a cluster of about 20 high-rise office buildings that had 
sprung up 1 5 miles due north of downtown Dallas. North Dallas straddled the 
Dallas Tollway just north of its intersection with the LBJ Freeway. It was the 
hub of a new Dallas financial center, and Dixon's Vernon Savings and Loan 
owned the 1 5-story high rise right in the middle. 

There, too, was State Savings and Loan of Lubbock, under the control of 
Dixon's friend Tyrell Barker. And Sunbelt Savings and Loan, playfully known 
around town as Gunbelt Savings for its quick-draw deals. Sunbelt was run by 
Ed McBirney, nicknamed "Fast Eddie" — a man people said was "so smart it 
was frightening." McBirney became famous in Dallas for lavish parties filled 


with wine, women, and debauchery at places Hke the Dunes Hotel and Casino 

in Las Vegas. Near Sunbelt were a host of other entrepreneurial thrifts. North 
Dallas was Texas-thrift mecca. 

Also in North Dallas was Jason's, the famous restaurant that became a favorite 
watering hole for deal makers who flocked to Dallas from around the world. At 
Jason's the manager, in desperation, had to co\er some tables with butcher paper 
to prevent speculators from scribbling deals on the linen tablecloths. And, finally, 
in North Dallas were the swanky homes and condos where many of the S&L 
deal-makers (including Dixon, Barker, and McBirney) lived. The setting was 
right out of the script for the popular IV nighttime soap opera Dallas, which 
was shot on location at the South Fork Ranch about five miles away. North 
Dallas buzzed 24 hours a day with the frenetic seven-days-a-week pace of mil- 
lionaires chasing their next million. For entrepreneurs in the early 1980s, North 
Dallas was where it was at. 

The Dixons gathered their belongings as the Vernon Savings jet dropped 
down into Addison Municipal Airport (also in North Dallas) where Vernon 
Savings kept its fleet of planes. The clerical staff that had accompanied the 
Dixons to Europe settled back in their seats for the landing. It had been a tiring 
but rewarding trip, and it was good to be home. Europe was terrific, but no 
place in the world could quite compare at that time to the brave new world of 

Don Dixon was a man in a big hurry and he had made it to the top fast. 
Even as a child Dixon had been in a hurry, always looking for ways to cut 
corners, always trying to get from here to there in the quickest and easiest way. 
He grew up in Vemon, Texas, a small town 1 50 miles northwest of Dallas and 
10 miles from the Oklahoma border, and his Type A tendencies had first shown 
themselves in high school, where, eager to get on to college, Dixon combined 
his junior and senior years so he could graduate a year early. His mother rein- 
forced this "go get em " behavior by presenting young Don with a brand-new, 
money-green, 1956 T-Bird hvo-seater convertible for graduation. Dixon report- 
edly once told a high school friend that his goal was to make so much money 
he'd "never be able to put a dent in it. " 

From high school Dixon went to Rice Institute in Houston, where he studied 
architecture for hvo years. Then he transferred to the University of California 
at Los Angeles and began a lifelong love affair with the Pacific beaches of 
Southern California. In June 1960 Dixon graduated from UCLA with his degree 
in business administration. That same year, o\er a thousand miles away in 
Dixon's hometown, R. B. Tanner cut the ribbon to open his little Vernon 
Savings and Loan. No one could have imagined how intertwined the hvo dis- 
parate launchings would become. 

Gray, Stockman, and the Red Baron • 187 

Dixon went from college straight to where the money was in those days 
— residential development. The year 1960 marked the height of the migration 
to the suburbs. Like honeysuckle vines, freeways sprouted from crowded cities 
and turned once-flat farm and grazing lands into sprawling residential de- 
velopments. The tide was rushing out and Dixon was there to catch the crest 
of the wave. 

He formed Raldon Homes with an a.ssociate, Raleigh Blakely, and the com- 
pany did well until the 1973-74 recession hit. Like most development com- 
panies, Raldon depended upon a steady stream of loans to provide the capital 
the company needed to buy land and build homes. With the recession the 
bottom dropped out of the housing market, and, according to published reports, 
Raldon found itself stuck with millions in development loans it could not pay 
off. Bankers complained about business cycles but didn't accept them as excuses 
for nonpayment, so, in a deal worked out between Raldon and its creditors, "Ral 
and Don" were forced to resign. 

With Raldon's liabilities off his back, Dixon waited the recession out, and 
when the real estate market picked up again, he formed Dondi Construction 
(DON Dixon), hi short order he was back on the top of the heap. Hundreds of 
homes bearing Dondi's unique signature trademark — Spanish styling topped with 
red tile roofs — began to pop up in the suburbs of Dallas. By 1981, at 45 years 
of age, Dixon was the head of a large, successful construction company that 
employed hundreds of people. He took to wearing gold chains, leather vests, 
and open-collared shirts around the office. People often said he reminded them 
of entertainer Kenny Rogers. Texas Monthly reported that his office staff handed 
out phony $3 bills with Dixon's picture on the front, under which was inscribed 
"Chairman of the Bored" and "In Don We Trust. " The reverse side featured a 
picture of one of Dondi Construction's homes with the caption, in mock Latin, 
"Red Tilebus Roofum." 

Dixon was riding high in the saddle when he teamed up with soul mate 
Tyrell Barker. Barker was a Northern California builder who had come to 
Texas recently when someone reportedly told him, "Hey, come on down 
to Dallas. We're making lots of money down here." Barker had already 
done very well in California real estate, and even after he moved to Dallas, 
government investigators said, he continued to maintain his $1.5 million 
home in Hillsborough, an exclusive community 20 miles south of San 
Francisco. He had purchased the home from the millionaire Hearst family. 
Barker was in his early forties, about three years younger than Dixon. He 
was noticeably hyperactive, an energetic workaholic with no family. Friends 
said he lived to "do deals. " He was stocky, wore glasses and a mustache, 
and he talked a lot — except when he was with Dixon, to whom he defer- 
red. He was smart and articulate, a man who had learned to compensate 
for a potentially crippling dyslexia that had kept him from graduating from 

188 • INSIDE )OB 

high school or, he later told a judge, being able to read beyond a third-grade 

Both Dixon and Barker were "deal junkies," as one FBI agent later de- 
scribed them, but their motivations were slightly different. Dixon had an 
appetite for the good life. He liked money and the pleasures it could buy. 
Barker, on the other hand, thrilled to the deal-making game and money was 
just the way he kept score. Dixon was a showman who enjoyed the parties 
and social amenities of his power. Barker was a loner who lived for his job. 
But neither of them was e\er satisfied. Dixon and Barker measured themselves 
by the Texas oil yardstick of the day, which rated one's personal fortune in 
"units," with one unit equaling $100 million. At chic Dallas cocktail parties 
each new arrival was sized up in whispered rankings, such as "I hear he's a 
four-unit man." Dixon and Barker were "no-unit men," and they wanted to 
change that. A partnership Barker formed soon after he came to Texas in 
1980 left no doubt where his priorities lay. He called it "MLMQ#1" — Make 
Lots of Money Quick #1. 

Though Texans traditionally made their money in oil, neither Dixon nor 
Barker knew one end of an oil rig from the other so they could not hitch 
their wagons to that star. What they did know was development and. through 
that, the banking and thrift business. They had also heard about thrift de- 
regulation, which had begun in 1980. And while as developers they had 
always had to go begging to lenders for money, they knew that if they could 
own their own S&L they would have ready access to all the cash (deposits) 
they wanted. So if they couldn't pump oil, maybe they could pump something 
better — money. 

They each decided to buy a savings and loan. 

Buying a savings and loan would cost more money than they had on hand, 
but Dixon had a close friend who was only too v\ illing to help with the financing. 
He had become friends with a wealthy Shreveport, Louisiana, businessman, 
Herman K. Beebe. Beebe must have been everything Dixon wanted to become. 
He traveled in a chauffeurcd limo and lived on a gracious southern-style plan- 
tation estate near Shreveport. He also had homes and businesses in Dallas and 
Southern California. Dixon and Beebe had met about five years earlier, and 
Dixon had become an unofficial member of the Beebe family. He often visited 
Beebe on his Louisiana plantation and the two men frequently traveled together, 
playing gin rummy and drinking bourbon on Beebcs plane. 

Beebe's flagship company, AMI, Inc. , was an enormous conglomerate whose 
primary interests were insurance and nursing homes. One of the products AMI 
specialized in was credit life insurance. (Banks making large loans often required 
a borrower to take out a life insurance policy in the amount of the loan. If the 
borrower died, the insurance would pay off the loan. ) Selling credit life insurance 
policies was a lucrative business, and Beebe had built close ties with many Texas 

Gray, Stockman, and the Red Baron • 1 89 

and Louisiana banks. Dixon was so taken with Beebe that he introduced Tyrell 
Barker to him and soon they were a threesome. 

"Terr\' and Beebc were on the phone to each other all the time," a friend 
said later. When Dixon and Barker decided they wanted to make their move 
into the soon-to-be-deregulated thrift industry, Beebe said he'd get them started 
by helping to finance their acquisitions. 


Going Home 

Don Dixon and his friend Tyrell Barker each began a search for an established 
thrift they could acquire with the minimum of fuss. Herman Beebe had solved 
their financing problems — all they had to do was find willing sellers. Barker hit 
pay dirt first when he landed State Savings and Loan of Lubbock, Texas. Lubbock 
(population 178,500) was a cattle town in West Texas at the center of prime 
Texas ranching country, about 300 miles west of Dallas. There 22 local citizens 
owned State Savings and Loan, a small, conser\ahve thrift with $65 million in 
assets, primarily mortgages on single-family homes. But State/Lubbock was strug- 
gling because the interest it had to pay to attract deposits was higher than the 
interest it was earning on its 30-year home mortgages. State/Lubbock's owners 
were in the throes of a classic 1980-81 thrift squeeze. 

With financial backing from Beebe, Barker gained formal control of State/ 
Lubbock on December 3, 1981. Two weeks after buying State, Barker removed 
much of the thrift's management, and regulators later said that from then on 
Barker and his attorney, Lawrence B. Vineyard, were in control. (Later Barker 
would tell the FBI that Vineyard was the guy who read his paperwork for him, 
since Barker, because of his dyslexia, had only a third-grade reading ability.) 
Barker wasted no time opening a headquarters office in Dallas, where the action 
was, and he bought two corporate planes for State so he could fly back and 
forth, even though it cost only $34 to fly from Dallas to Lubbock on a commercial 

Barker later said he felt like a kid in a candy store. His oak-paneled office 
was on the first floor of a North Dallas high rise, and outside the sliding glass 
doors he had a miniature swimming jxiol built for his two dogs, an English 
bulldog and a Labrador retriever, who traveled with him wherever he went. 
Inside, he had a bar, a kitchen, and a fireplace, all the comforts of home. He 
even had a pull-down bed, just in case. He often entertained customers dressed 


Going Home ■ 191 

in his jogging suit or jeans and suspenders. He worked from 7 a.m. until 11 
p.m. Newsweek quoted him as saying his motto was "if 1, I rust." 

Word quickly spread among Dallas speculators, and Barker's waiting room 
was soon jammed with developers waiting their turn to pitch projects. Barker's 
message to them, some said later, was simple: "You bring the dirt, 1 bring the 
money. We split 50-50." The easy money produced a rush of customers eager 
to take advantage of Barker's lenient loan policies. 

"How do you know what property to buy?" someone reportedly asked a 
developer scurrying to get one of Barker's loans. 

"Wherever my dog lifts his leg 1 buy that rock and all the acreage around 
it," came the reply. 

With his friend Tyrell Barker up and running, Don Dixon was searching in 
earnest for his place in the sun. That search took him back to his roots in little 
Vernon, Texas, where, the same spring Dixon had graduated from college in 
California, R. B. Tanner had opened Vernon Savings and Loan. Dixon decided 
to ask Tanner if he'd like to sell out to a local boy. 

Vernon Savings and Loan, with $82 million in assets and only $90,000 in 
delinquent loans, was one of the soundest thrifts in the state. Tanner had run 
Vernon since he opened it in 1960 as though every paper clip and rubber band 
were hard cash. Friends said he even worked an entire year without a salary just 
to improve Vernon's balance sheet. Vernon Savings was his baby and he nurtured 
it lovingly. His small, modest office was dominated by a large oil painting of 
the First State Bank of Dumas, Texas, the very first bank he had audited as a 
young bank examiner in 1937. 

Dixon arrived at Tanner's home that spring day wearing humility on his 
sleeve. R.B., dressed in shirt, tie, and suspenders, sat across from the stylishly 
dressed Dixon and listened to Don talk lovingly about his roots in Vernon. (Later 
Mrs. Tanner would recall sadly that Dixon displayed "perfect manners.") Dixon 
said he had benefited greatly from his wholesome upbringing there and he wanted 
to give something back to the community. He showed Tanner some of the 
plaques he had been awarded for his real estate developments. Though R.B. 
had not known the Dixon family well, young Don had grown up with the 
reputation of someone who would amount to something, so Tanner wasn't 
surprised that the successful young developer had the will and means to buy his 
savings and loan. But he was surprised at the generosity of Dixon's offer. The 
deal: Dixon would pay $5.8 million for Vernon's outstanding shares, $1.2 million 
in cash. The balance, Dixon told him, would be secured not only by Vernon 
stock but also by a rich business friend of his from Louisiana, Herman K. Beebe. 
How could Tanner lose? 

Tanner took Dixon's offer to the other Vernon shareholders, who agreed it 
was generous, and on January 10, 1982, the deal was done. Don Dixon now 
owned Vernon Savings and Loan. Dixon told Tanner and the other board 


members that he was busy with his construction company and really had no 
interest in running Vernon. He asked if they would stay on board. They agreed. 
But Tanner was in for a rude awakening. 

A month later the Vernon Savings board of directors held their first meeting 
since the change of ownership. Dixon did not attend, but he sent word to an 
astonished board that he had purchased, with the thrift's money, a $125,000 
three-foot-tall bronze sculpture of a squatting Indian. Art was a great investment, 
he said, especially Western art, and he wanted the board to rubber-stamp the 
purchase. The slack-jawed directors looked around in stunned silence and then 
glumly approved the purchase. For the prudent, conservative Tanner, the shock 
of this extravagance was too much. He resigned his position on Vernon's board 
and went home to reflect, he told us later, upon the man to whom he had sold 
his pampered thrift. 

Dixon soon forgot any gratitude for his wholesome small-town roots and 
promptly moved Vernon's administrative offices to a 1 5-stor>' building in North 
Dallas. His business plan for Vernon was to attract brokered deposits and use 
them to finance commercial real estate projects (an abrupt departure from Ver- 
non's traditional role as a local home lender). Our investigation of Mario Renda 
had already tipped us that First United Fund had brokered huge deposits into 
Vernon. Some of Renda's former employees (Manning's Se\en Dwarfs) said 
Vernon Savings was one of First United Fund's "special deal" institutions (which 
meant that in exchange for getting the deposits, Vernon agreed to make loans 
to designated borrowers). 

Dixon, who was abo\e all a developer, not a banker, could have used some 
of that financing too. But he was faced with thrift regulations that prohibited 
large loans to "affiliated persons," and by owning all of Vernon's stock Dixon 
was about as affiliated as a person could be. Later, regulators said that to get 
around that thorny problem he created a complex web of some 50 subsidiary 
companies, layered in three tiers, at the apex of which was Dondi Financial 
Corporation. Dixon was a controlling owner of Dondi Financial and Dondi 
Financial was made controlling owner of Vernon Savings. But Dondi's other 
subsidiaries did not own Vernon Savings stock so they could promptly take their 
place in line to receive loans from the thrift. Dixon had pulled off a brilliant 
Trojan horse maneuver. And once Vernon Savings' money entered Dixon's 
maze of subsidiaries, regulators complained, it was rarely seen or heard from 

To run this empire Dixon built a loyal entourage of managers. He refused 
to give us his side of the story, but according to court records and federal 
regulators, he purchased his employees' loyalty with extravagant perks. Each 
head of a subsidiary received a new Mercedes sedan, for example. Offices and 
bonus plans were lavish. The result was a go-along, get-along, get-rich-too crew. 

Going Home "193 

many of whom asked few questions and did wliat they were told. Their loyalty 
and cooperation allowed Dixon to enjoy the fruits of this enterprise while ap- 
pearing to maintain distance from the day-to-day activities that eventually led 
to Vernon's demise. One exception to the go-along was Jack Brenner, who, for 
example, was asked to ciieck out some property Vernon Savings had bought in 
California. When Brenner called home he told Vernon president Woody Lem- 
ons that the property was worthless. It was a "boulder farm," he said. 

"Now, Jack, you go look at it again," Brenner .said Lemons told him. "You 
go look and tell me if you don't see a Gulf Stream 50 [a top-of-the-line corporate 
jet] in that land." Brenner said he realized in a flash that the whole project was 
just a way to siphon money out of Vernon and into something quite different, 
in this case a very expensive toy. 

"I just said, 'Aw the hell with ya,' " Brenner recalled. 

In just a few months Dixon converted little country-bumpkin Vernon Savings 
into a high-rolling, multitiered corporate conglomerate and for the next four 
years he took the S&L for the ride of its life. Vernon Savings had reported assets 
of $82.6 million in early 1982. In 1986 it would report assets of $1.3 billion. 
Regulators, who had begged entrepreneurs to step in and save the ailing thrift 
industry, were delighted. They soon added Vernon Savings to their published 
list of "High Performance Associations." Vernon was just one more shining 
example of what American business could do when government got out of its 
way, they said. 

Regulators later charged that Dixon and some senior officers at Vernon 
wasted no time turning on Vernon's spigots and directing the money flow in 
their direction. Between July 6, 1982, and January 3, 1986, Vernon declared 
$22.95 million in dividends, of which Dondi P'inancial Corporation received 
$22 million. Thus millions of dollars were transferred from Dixon's regulated 
thrift, which had to account to federal and state regulators for every dollar, to 
his holding company, Dondi Financial Corporation, where he could use the 
money however he chose. But even with his Dondi Financial coffers bulging 
with Vernon's money, Dixon seems to have dipped directly from the Vernon 
Savings till whenever possible. It appeared that his every need, his every scratched 
itch, became a legitimate business expense for Vernon. Regulators later charged 
in court that Dixon and his senior officers "wrongly extracted" at least $40 million 
from Vernon. 

In early 1983, for example, one of Vernon's subsidiaries paid $1.9 million 
for a Swiss-style chalet, built of stone, in the exclusive Colorado ski community 
of Beaver Creek. The 85 homes at Beaver Creek, nestled in the Rocky Mountains 
in prime skiing territory, were stricfly for the rich and powerful. Homeowners 


were transported to and from flic ski lifts by Beaver Creek's chauffeured linios, 
which served hot coffee and doughnuts on the way to the lifts and sparkling 
wine on the way back home. 

Many of the houses at Beaver Creek, records showed, were built with money 
provided by a half dozen go-go Texas thrifts, Vernon among them, and each 
S&L made sure it had its own posh retreat there. Western Savings and Loan 
owner Jarrett Woods had a $2 million cabin, as did Morton Hopkins, owner of 
Commodore Savings of Dallas, and Chuck Wilson, owner of Sandia Savings of 
Albuquerque, New Mexico. According to news accounts, Wilson particularly 
liked to watch the skiers from his hot tub in his rooftop cupola with its heated 
slate floor. Sandia Savings purchased its stone castle retreat, complete with ponds 
and towers and waterfall, with a $5 million loan from Vernon.- All four thrifts, 
and their management, were inside players in the Texas thrift game, making 
loans back and forth to each other, and by 1988 they would all be insolvent or 
struggling to survive. 

Beaver Creek was fine when Don and Dana were in the mood for snow, 
but their first love was Southern California and a $1 million Solano Beach house 
just north of San Diego. Dixon's role model, Herman Beebe, had located the 
house when, in early 1981, his vacation home at La Costa Resort in Southern 
California was being redecorated and he needed a place to stay in the interim. 
When Beebe found the Solano Beach house he had Dixon and Barker fly out 
west for a look. They liked it and Dixon entered into a lease option on the six- 
bedroom, 5,000-square-foot home. Beebe moved in and stayed there until the 
renovation of his La Costa house was complete. After Don and Dana Dixon 
were married in 1982 (regulators later charged Vernon Savings paid for the 
wedding), the Solano Beach home became their favorite hideaway. They com- 
muted on Vernon's jet behveen Dallas and California, spending three and four 
days a week at Solano Beach. Barker visited on weekends. Dixon had the Solano 
Beach house remodeled, and when the work was complete he named two of 
the master bedrooms — one the Dixon Suite, the other the Beebe Suite. 

Dixon must have realized that deregulation was a gift from Washington, 
and what Washington giveth, Washington could taketh away. Vernon needed 
a way to show its appreciation and just the item was tied up at a yacht harbor 
in Florida. Even the name, High Spirits, was apropos. She was docked in Boca 
Raton, Florida, and what a dream boat she was. Built in the late 1920s, she 
was 1 12 feet long and she reeked of Gatsby-era charm. Her sleek white hull was 
topped by two levels of cabins made of lacquered natural wood. Shining brass 
handrails enclosed her promenade and poop decks. Her main parlor was as 
spacious and luxurious as the living room of a country manor. Her staterooms 
rivaled those of fine old hotel suites. And to cap it all off she was the sister ship 
to the presidential yacht. Sequoia. How was that for a political attention getter? 
She was a beauty. She was perfect. She was $2.6 million. 

Going Home '195 

Federal regulators might have found it a bit hard to justify the purchase of 
a yacht for a landlocked Dallas thrift, so Vernon executives and customers formed 
the High Spirits Limited Partnership. According to the FSLIC, Vernon routed 
over $2 million to the "partners" (by overfunding on a $10 million loan to a 
San Antonio shopping center, according to the FSLIC),' so they could "buy" 
their shares of the partnership. FSLIC claimed that the partners were never 
required to make any payments whatsoever and that Dixon in turn used the 
High Spirits as though it were his and Vernon Savings' personal flagship. 

High Spirits, with its permanent crew of three, became a migratory bird. In 
the cold winter months Dixon docked her in Boca Raton. But as soon as the 
cherry blossoms were out up north, he had her moved to Washington, D.C., 
where he used her as a floating party platform to wine and dine some of this 
country's best-known and most powerful politicians. The bill for flowers alone 
was reportedly $800 a day. By far the most frequent sailor on Vernon's yacht 
was Representative Tony Coelho, who, according to the captain's log, used High 
Spirits almost as often as Dixon. (A four-term congressman from California's 
San Joaquin Valley, Coelho had been a fund-raiser par excellence since becom- 
ing chairman of the House Democratic Campaign Committee in 1981. After 
federal bank examiners discovered that Coelho and the campaign committee 
had used the High Spirits for 1 1 political fund-raising events in 1985 and 1986, 
Coelho and the committee repaid Vernon $48,450. In 1987 Coelho would 
become House majority whip, a position he held until he resigned from Congress 
in 1989 rather than face an ethics probe.) Others sailors included Texas Con- 
gressmen Jake Pickle (D-Austin) and Jim Chapman (D-Sulphur Springs), Texas 
lobbyist Durward Curlee (who reportedly lived on the High Spirits when he was 
in Washington),^ and House Majority Leader Jim Wright (D-Texas). 

Yachting was all well and good, as far as it went, but rich people, really rich 
people, jetted regularly to the Continent. In 1983 off the Dixons flew on a private 
chartered jet to Europe. Dixon justified the tour as a business trip because, he 
told associates, he and Dana were researching three-star restaurants on the pos- 
sibility that Vernon might open a French eatery of its own, maybe in Dallas. 
Dixon said he might even hire a famous French chef to run the place. {The 
Wall Street Journal reported that in Lyons Paul Bocuse, a well-known French 
chef, actually assembled his 12 sous chefs in the restaurant courtyard for Dixon's 
review.) Don and Dana hopscotched across Europe from one three-star Michelin 
diner to another, eating their way through France. All in all, they sampled seven 
different world-class restaurants, in what Dana described in her diary as a "flying 
house party ... a gastronomique-fantastique!" 

Dana wrote that as they traveled on their comfortable chartered jet, or in 
Rolls-Royces, in the company of a group of European socialites, their way was 
prepared for them by Philippe Junot, the former playboy-husband of Princess 
Caroline of Monaco. He had found his way onto Vernon's payroll as a "con- 


sultant" for all things European. When the trip was over the Dixons had run 
up a $22,000 tab — paid for, said an FHLB examiner, by Vernon Savings, even 
though Dixon was neither an officer nor a director of the thrift. Later, responding 
to criticism of the trip, Dixon told James O'Shea of the Chicago Tribune, "You 
think it's easy eating in three-star restaurants twice a day six days a week? By the 
end of a week, you want to spit it [the food] out. " 

Aside from the stress of eating in three-star restaurants twice a day, Dixon 
had no real complaints about the trip itself, but using a "rent-a-jet" dulled the 
gloss a bit, so when he returned he went jet shopping. He wound up with what 
regulators would later call "a small air force." hi another apparent effort to keep 
frivolous items out of regulatory view, Dixon made a deal with a small company, 
Coronado Air, Inc., whereby Vernon Savings loaned Coronado Air the money 
to buy the aircraft and Vernon then leased the planes from them. An FHLB 
examiner said the first purchase was a Falcon 50, considered the Rolls-Royce 
of corporate aircraft. The lease cost Vernon Savings $39,500 a month and 
eventually rose to $65,000 a month. Dixon liked the Falcon and quickly made 
it his personal aircraft, but that left other Vernon executives facing the disgrace 
of commercial air travel. So Vernon loaned another $1.7 million to Coronado 
Air, this time for the purchase of a 1978 Lear Jet 35A. Vernon then leased the 
aircraft back for $23,125 a month. By 1985 the lease had jumped to $35,000 a 
month. Those two jets alone were costing Vernon nearly $100,000 a month by 

But Vernon's many subsidiaries employed many executives. To make certain 
none of the loyal troops felt slighted, Vernon bought three airplanes, a Cessna 
Citation, a Cessna 414A, and a King Air E-90 long-range twin turbo prop. And 
for those short hops to the store, a helicopter. Planes needed pilots, and Vernon 
kept six full-time pilots on the payroll in its corporate "ready room" at Addison 
Municipal Airport in North Dallas. 

Vernon's jets, three of which were baby blue, were rarely idle. The logs of 
the Falcon, now in possession of the FSLIC, listed only Don and Dana as 
passengers on at least six flights. Also, like the Dixon navy, the Dixon air force 
played host to a gaggle of politicians. Among them, according to the logs, were 
former President Gerald Ford and his wife, Betty, Vernon's neighbors at Beaver 
Creek, who hitched several rides at costs ranging from $6,000 to $1 3.000, Texas 
Monthly reported. Other high-flying political guests included Representative Jack 
Kemp of New York; Senator Pete Wilson and Congressman-cum-boatswain's 
mate Tony Coelho, both from California; Senator Paul Laxalt of Nevada; and 
Representative Jim Wright of Texas (later to become speaker of the House). 
Dixon's air force was proving a handy alternative to commercial travel for Dixon's 
politician friends. (In just three years this fleet of aircraft cost Vernon Savings 
$5,574,942.40 to lease and operate, an FHLB examiner later testified. 

A review of the people listed on the flight logs of Vernon's jets turned up 

Going Home -197 

many other names familiar to us: Larry Taggart, former California S&L com- 
missioner; Ed Mittlestet, the president of Charles Bazarian's company, CB Fi- 
nancial; and Eric Bronk, attorney for Consolidated Savings and Loan's owner 
Robert Ferrante/ We were starting to feel right at home at Vernon. It was 
becoming clear that whatever the network was that we were piecing together, 
Don Dixon had definitely plugged himself and Vernon info it. 

One of the Cood Clc Boys' favorite Texas pastimes was hunting, and as a 
boy Dixon had particularly enjoyed quail hunting with his dad in West Texas, 
so a partnership chipped in $2.4 million for a posh hunting club. The huge 
Sugarloaf Lodge sat atop a loaf-shaped mountain about ^0 miles southwest of 
Vernon. Suites had magnificent views overlooking a canyon, and hot tubs with 
Jacuzzis .soothed the woodsmen's aching muscles. 

To the hunting club's armory were added $40,000 worth of handmade Italian 
shotguns embellished with gold and silver inlay. But hunting, even with fancy 
guns, could be a hit-or-miss proposition, as one guest later recalled, so live quail 
were flown in from Illinois the day before the hunt. Their wings were clipped 
and tail feathers plucked so they couldn't possibly fly. "Hunters" then stood on 
Sugarloaf s sweeping deck, overlooking the canyon, while hired hands crouched 
on a ledge below and threw the quail into the air as the guests blasted away. If 
a bird survived one volley, it was recycled until someone finally nailed it. A lot 
of Illinois quail met an ignoble end at Sugarloaf 

Although diverting, skiing at Beaver Creek and shooting plucked quail at 
Sugarloaf did not alter Dixon's preference for California and its sunny beaches. 
He and Dana threw lavish parties at their Sola no Beach home, mixing with 
Southern California's Who's Who, and it wasn't long before Dixon came to the 
conclusion that he should become a pillar of the community like other socialites. 
He had an office there and some real estate projects in the works. Now he should 
contribute to a worthy cause. 

After looking for such a cause he finally settled on the University of San 
Diego. He wasn't ready to part with money, mind you. Instead he donated 
Dondi Financial Corporation stock to the university, and he threw in a written 
commitment that, if asked, he would buy the stock back for $3 million cash. 
The donation was a stroke of genius. It cost Dixon nothing (and would ultimately 
be worth nothing, after Dixon filed for bankruptcy in 1987), but it brought 
instant pillardom and covered nearly every conceivable social, political, and 
karmic (an important consideration in California) base. Suddenly Dixon was the 
darling of USD's influential alumni, who in turn plugged him directly into a 
powerful circle of local, state, and federal politicians. Among them was Con- 
gressman Bill Lowery (R-San Diego), for whom Dixon promptly threw a $7,000 
campaign fund-raiser. He also took L,owery for rides on Vernon's jet and threw 
parties for him on the High Spirits. Lowery later told reporters he thought Dixon 
himself owned the jet and the yacht, but Dixon charged it all to Vernon Savings. 


The congressman reimbursed Dixon, but somehow, according to the FSLIC, 
those reimbursements never made their way back to Vernon. 

To enhance their enjoyment of the Southern Cahfornia scene, the Dixons 
joined the private Moonhght Beach Chib in Encinitas, just north of Solano 
Beach. A membership cost them $2, 500. The club wanted to expand and buy 
a condo project nearby that the Dixons (and Vernon Sa\ings CEO Woody 
Lemons) owned. The Moonlight Beach Club didn't have enough money to buy 
the condos from Dixon so regulators said he helped the club raise the cash this 
way: When businessmen wanted to borrow money from Vernon, some were 
told they first had to join the Moonlight Beach Club. Memberships, for them, 
cost $77,500 to $155,000 depending on how large a loan they wanted from 

To reward high-performance employees Dixon and Vernon's executive com- 
mittee decided to distribute Vernon's booty through a Bean Program, regulators 
later alleged in court. Under the Bean Program, "beans" were awarded instead 
of bonuses to Vernon executives and employees based on their performance. 
Between June 1983 and June 1986, a FSLIC lawsuit revealed, Vernon paid out 
$15 million in beans. $10 million of the beans were subsequently redeemed for 
cash and Vernon kept $5 million, calling it deferred compensation. 

There was a hitch — one that regulators said benefited Dixon at Vernon 
Savings' expense. Employees participating in the Bean Program were also re- 
quired to buy stock in Dondi Financial Corporation. Dixon would arrange loans 
from Vernon for them to buy the stock. (Vernon made over $678,000 in such 
loans.) Employees were then required to use part of their bean bonuses to make 
the payments on the loans. Buying stock in Dixon's Dondi Financial was what 
qualified them to participate in the Bean Program. Eighty employees took part 
in the plan, which appeared, in fact, to be simply another scheme to funnel 
money from Vernon to Dondi Financial. Ihe plan seems to have helped turn 
some of Vernon's top executives into an army of little Jacks ready to climb the 
magic beanstalk whenever Dixon snapped his fingers. 

By the dawn of 1984 the Vernon Savings of 1982, with its $82 million in 
assets, was a distant memory. The thrift now boasted assets of $450 million, 
made up of what would later turn out to be a murky stew composed of brokered 
deposits, bad loans carried as sound ones on the books, and properties Vernon 
carried on its balance sheet at grossly inflated values. Vernon was wildly making 
loans without regard to their intrinsic value because the thrift made its money 
up front, in large origination fees. The S&L charged up to 5 points for originating 
a loan, so on a $100 million loan Vernon immediately "made " up to $5 million. 
The thrift also charged 1 percent to 2 percent to renew the loan ever,' six months 
(once a year was standard practice in the industry). So what if the borrower later 

Going Home "199 

defaulted on the loan? Vernon had already made its profit. And who else was 
to know? I'he Federal Home Loan Bank Board's $14,0()()-a-year examiners? 
Vernon's sophistieated maze of business dealings left those shavetail aceountants 
scratching their heads. Besides, the Federal Home Loan Bank for District 9 
(Arkansas, Louisiana, Mississippi, New Mexico, Texas), where there were about 
300 S&Ls. had just reduced its agents and supervisors from H to 12, in the 
spirit of deregulation. It now took up to two years just to schedule an examination 
of a thrift, and .some had not been examined in over three years. 

Eventually, though, Dixon's ostentatious life-style began to raise questions. 
When federal auditors got around to examining Vernon's 1983 books, they 
became alarmed by the institution's headlong dive into brokered deposits, helter- 
skelter development, and loans to the maze of subsidiaries bearing the mark of 
"Dondi. " Bank records show that in August of 1984 regulators forced Vernon's 
board to sign a supervisory agreement binding Vernon to strict guidelines. The 
feds had no idea what was going on at Vernon because it was all moving too 
fast. They wanted to slow things down until they could figure out whether what 
they were seeing was the promise of deregulation incarnate or a thrift regulator's 
darkest nightmare. 

The supervisory agreement was a sobering event to Vernon's board of di- 
rectors, who still conducted their board meetings in Vernon, 150 miles from 
the Dallas action. All in their sixties and seventies, holdovers from R. B. Tanner's 
day, they never really understood Dixon's fast-moving deals so they had to trust 
him and his officers to make the right decisions for the thrift. Their confusion 
allowed Dixon (who served on the thrift's powerful loan committee, where the 
decision was made to approve or disapprove a loan or investment, even though 
he was never an officer at Vernon) and his associates to blunt the effect of the 
supervisory agreement, as Vernon employees later testified. Deals the board had 
never approved were added to the minutes of the board meetings after the 
meetings were held. Boilerplate language, designed solely to comply with the 
supervisory agreement, was added to the minutes so the directors thought they 
were complying. After the board meetings the real minutes and tape recordings 
of the board meetings were destroyed in the Dallas office. The board was also 
given inaccurate data on the condition of Vernon's loan portfolio, and the list 
of delinquent loans submitted to the board of directors was woefully incomplete. 
In short, the supervisory agreement apparently was little more than an annoying 
roadblock that Dixon and his associates quickly found a detour around. It would 
take more than regulatory saber rattling to stop the Don Dixons of Dallas. 

Dixon's sidekick, Tyrell Barker, hadn't been idle either. His State Savings 
of Lubbock had also mushroomed into a megathrift using brokered deposits, 
high-risk lending, direct investments, and — as was later proven in court — fraud- 


ulent deals. While federal regulators were focusing on Dixon, Texas state reg- 
ulators were wringing their hands over Barker, who was not only looting State 
Savings but was branching out and acquiring other thrifts as well. Barker had 
bought Brownsfield Savings in Brownsfield, Texas, and Key Savings, located 
just outside Denver.*" 

Barker had also struck up a friendship with Tom Nevis, 39, the president 
of Nevis Industries in Yuba City, California. Nevis Industries described itself in 
a corporate profile as "a highly diversified real estate development and agri- 
business concern with major holdings throughout California as well as in Ari- 
zona, Colorado, Kentucky, Mississippi, Oregon and Nevada.'" The company 
reported that its holdings were worth $100 million in 1981 . Tom Nevis sat astride 
this megabusiness in an elaborate office with a macho Western motif of stuffed 
trophy animals, pictures of Nevis on hunting trips, pictures of Nevis in a bar 
riding a mechanical bull. 

Nevis Industries had borrowed heavily to acquire this far-flung empire, bel- 
lying up, for example, to the troughs of State Federal Savings and Loan of 
Corvallis, Oregon. Federal investigators said Nevis walked off with about $81 
million in loans in a gross violation of loan limits to a single borrower after 
Beverly Hills loan broker Al Yarbrow introduced him to the thrift. (Federal 
investigators said State/Corvallis paid Yarbrow $900,000 in commissions for loans 
he placed there. Yarbrow was later indicted for one deal in which he took his 
commission in the form of an $88,000 white Rolls Royce.) An FSLIC lawsuit 
revealed that regulators believed Nevis had participated in defrauding State Sav- 
ings of Corvallis by using straw borrowers and cash-for-trash schemes." 

U.S. Attorney Lance Caldwell and lone FBI agent Joe Boyer spent nearly 
three years piecing together the dozens of mind-numbing deals at State/Corvallis, 
which they said could cost the FSLIC over $150 million. As a result of their 
work, a grand jury indicted Nevis, \'arbrow, Mitchell Brown, and others on 
numerous counts of conspiracy, bank fraud, and mail fraud. Nevis was found 
guilty on 28 counts in May 1989. The Yarbrow and Brown trials were pending 
as of this writing. 

Published reports and regulatory documents indicated that Nevis Indus- 
tries had run up an impressive loan tab of at least $8 million at Eureka Federal 
Savings and Loan of San Carlos, California, before showing up at State^ and 
had borrowed heavily from Fidelity Savings and Loan of New York, Coast 
Savings and Loan of San Diego, and American Savings and Loan of Stockton, 
California. Nevis's S&L take totaled more than $100 million, law enforce- 
ment officials told us. 

In 1983 a friend had introduced Nevis to Tyrell Barker, to the mutual benefit 
of both men."* For example, regulators said, $8 million of the money Nevis got 
from State/Corvallis went to purchase a Texas resort from Barker. And Barker 


Going Home • 201 

helped Nevis with a complex transaction that involved the Sioux City Hilton 
(in Sioux Cit\', Iowa), which Nevis had acquired. 

The hotel was losing $50,000 a month, but Nevis wanted to sell it at a profit. 
To accomplish such a magical maneuver, Barker, records showed, agreed that 
State/Lubbock would loan a Georgia company the money to buy the Hilton 
from Nevis. Nevis immediately channeled $2 million of the proceeds to a com- 
pany called Doc Valley, Inc., that regulators said he controlled. After State/ 
Lubbock failed and investigators tried to unravel that deal, they couldn't figure 
out who owned what. The Georgia company said State/Lubbock (Barker) owned 
the Hilton. Barker said, "Hotel? What hotel?" Nevis said Barker owned Doe 
Valley. Barker said, "Huh?" Federal investigators dug into Doe Valley's books, 
only to discover that they were unauditable. (In 1988 a Texas court ruled in 
favor of State Savings/Lubbock and ordered Nevis to repay $11.3 million in 
connection with the Sioux City Hilton/Doe Valley case.) 

Regulators warned Barker that he had to stop making risky loans and needed 
to get the thrift's records in shape. Barker reacted by hiring four auditors to 
straighten out the mess at State/Lubbock, but after a look at the books they just 
threw their hands up in despair, finding the situation beyond comprehension. 
Through it all there was one thing that didn't concern Barker in the least, and 
that was the loss that the FSLIC would sustain if it had to close State/Lubbock 
and pay off the depositors. 

"I bought the institution, and that's what I buy insurance for," he said, 
referring to the premiums State/Lubbock paid to the FSLIC. With Barker dis- 
playing that kind of cavalier attitude, the next step was probably inevitable. In 
May 1984 the regulators kicked him out (though they say they believe he con- 
tinued to exercise influence over State/Lubbock until they finally closed the 
institution in December 1985). Barker's unceremonious ouster as the president 
of State/Lubbock came only two months after Ed Gray in Washington saw the 
video of Empire Savings' 1-30 condos (the "Martian landing pads" on the 
outskirts of Dallas) and closed Empire Savings. '" The assault on the two major 
thrift institutions shocked Texans, and an uneasiness crept into the back rooms 
of North Dallas's financial district. 


Dark in the Heart of Texas 

Slowly, throughout 1984, the regulaton- noose tightened in Texas. Ed Gray 
sought support for his regulation that would go into effect March 1985, limiting 
direct investments and placing a 25 percent annual growth limit on S&'Ls. 
Regulators also began to demand that thrifts acquire more accurate appraisals. 
But during the heat of the debate that surrounded these moves, even as it became 
increasingly evident that Ed Gray wasn't going to back down, no one would 
have guessed a thing was wrong at Vernon Savings and Loan. Vernon looked 
great — on paper. Trade journals routinely listed Vernon among the country's 
soundest and most profitable institutions, and Vernon itself crowed that it was 
the most profitable thrift in America. Vernon looked so hot, in fact, that a month 
after California Savings and Loan Commissioner Larr)' Taggart left that post in 
January 1985 he went to work for Dixon as a consultant. Taggart had no regrets 
for having presided o\er the deregulation of the California thrift industr>', and 
he believed Texas thrifts' recent problems were simply caused b>' the downturn 
in the oil economy. He viewed with alarm the frantic attempts by his former 
friend Ed Gray to tighten S&L regulations. He felt that, as someone who had 
been a regulator, he could help the industr\ by lobbying politicians in Wash- 
ington to remain steadfast in their commitment to thrift deregulation. And he 
set off to do just that. 

With Taggart in Washington singing the company song, the High Spirits 
docked in Washington keeping politicians happy, and a fleet of planes giving 
politicians rides home, Dixon must ha\e felt he had his bases covered and had 
little to fear from the lackluster and politically impotent Ed Gray. Dixon con- 
tinued to improve his bottom line at Vernon's expense. He decided to abandon 
the Solano Beach house in favor of more elaborate quarters down the road in 
Del Mar, where he had one of Vernon's subsidiaries buy a luxurious $2 million 
home. The house fronted a long expanse of beach. It was two stories, with 




Dark in the Heart of Texas • 203 

rounded corner windows and verandas overlooking the Pacifie. Tall palms sur- 
rounded the porch, and wide steps led to the fine white-sand beach below, 

Although the money for the purchase came from Vernon Savings, regulators 
said Vernon's board of directors was never consulted. Dixon then set up two 
bank accounts at Vernon Savings and filled them with Vernon money, which 
he used to pay the $561,874 in living expenses he incurred during liis 18 months 
in the Del Mar house. Some of the items paid out of the accounts, according 
to regulators, included: 

Flowers— $36,780 

Pool service — $4,420 

Car service— $23,845 

Catering— $13,446 

Pet services — $386 

Graduation Party— $2,408 

Telephone— $37,339 

Utilities— $29,689 

Cable TV— $1,794 

Plants— $5,901 

Political fund raiser for San Diego Congressman Bill Lowery — $7,238 

Miscellaneous— $101,075 

Petty cash— $44,095 

A bottle of perfume— $1 10 

Life was sweet in California and the Dixons spent about 40 percent of their 
time at the Del Mar house, where they became known for their gracious dinner 
parties and where they kept an extra Rolls-Royce parked in the garage just for 
weekend guests. Their West Coast homes also served as a political lobbying 
platform for Dixon, who reportedly hosted political figures such as former Texas 
Governor John Connally, former Texas Lieutenant Governor Ben Barnes,' and 
Edwin Edwards, the colorful governor of Louisiana, among many others. 

"It was a real circus," said one who was around at the time. "They had 
something going at that house every weekend." 

A succession of friends stayed at the Solano Beach house after the Dixons 
moved to Del Mar. One of those friends was Charles Bazarian of Oklahoma 

204 • INSIDE )OB 

Cih'. Fuzzy, we learned, met Dixon in 1985, thanks to loan brokers Al Yarbrow 
and Jack Franks, who made the introductions. Once again it was driven home 
to us the key role played by loan brokers in this drama, as they scurried around 
the country connecting round-heeled bankers with horny borrowers. - 

Bazarian became a prominent figure in the Dixon entourage in both Dallas 
and Southern California.' Later Bazarian would tell us that for a time Dixon 
was a good friend who, he was sure, had never set out purposefully to loot a 
savings and loan. 

Bazarian did agree, though, that Dixon definitely was a high liver. 

"Didn't we ha\e wonderful parties?" he sighed. 

Jack Brenner, the contractor employed to manage some of Vernon's Cali- 
fornia assets, confirmed the party rumors. "They were always having parties at 
that house in California. I went to only one, and we just turned around and 
walked out. The house was a maze of hookers," Brenner told a reporter. '' 

Later an East Coast banker recalled for us the time Dixon paid his expenses 
to fly to San Diego and had a limousine pick him up at the airport. 

"We went to that famous Del Mar beach house of his. Dixon was there 
with his wife, and there were these women there. I said to Dixon, 'Who are 
these women? They are gorgeous honeys. ' Dixon told me, 'These are your dates 
for the night, a little female companionship. You might get a little lonely at the 
beach house. You might want a little company for the night.' 

"I wasn't expecting that. My face turned bright red. I told Dixon, 'Gee, I 
was thinking of going back to my room to work on this loan deal.' And the 
subject quickly changed to hunting." 

Prostitutes became just another perk for Vernon's employees and 
customers — sort of human "beans," if you will. Later Vernon's senior vice 
president, John V. Hill, would be indicted on a federal felony charge of bank 
bribery (he ultimately pleaded guilty to a conspiracy charge and agreed to co- 
operate with prosecutors). He was indicted for what the government quaintly 
termed giving "a thing of value in excess of $100," making "sexual favors . . . 
available to Vernon officers and directors in connection with their ser\ice to 
Vernon and to Vernon's owner, Don R. Dixon." Hill admitted he had arranged 
for Vernon Savings to hire two Dallas women and up to ten San Diego women 
to attend the first and third nights of a three-day celebration during a Vernon 
Savings board meeting in Southern California in 1985.' 

When Dixon wasn't hosting such affairs he used the Del Mar house to 
maintain his status with the Southern California upper crust. But not everyone 
invited to the Del Mar mansion liked what he saw. Old Rolls-Royce money 
could smell new stretch-limo money a mile away. A wealthy California publisher 
recalled later, "My wife and 1 felt very strange about them [the Dixons]. Every- 
thing was too lavish, too big. It seemed to us if they were real they wouldn't be 
so socially and politically aggressive." 

Dark in the Heart of Texas • 205 

The Dixoiis decided to make another trek to the Continent. Tliis time Dixon 
and tlie httlc lady liit the liigh spots of P'rance, England, and Denmark and 
justified this trip by forming a new subsidiary, VernonVest, based in Munich. 
Dixon claimed that VernonVest would attract foreign deposits to Vernon, but 
records showed all it ever attracted were expense vouchers for the Dixons' trips 

And still Vernon Savings continued to grow. By 1985 Vernon's assets stood 
at a staggering $1 billion. (Brokered deposits made Vernon look better than the 
truth would have it.) 

just months after their second European tour the Dixons decided the time 
was right for another. This trip took form one day when Dixon was chatting 
with his new friend, Roman Catholic Bishop of San Diego Leo T. Maher, and 
discovered that the bishop and Monsignor 1. Brent Eagen, pastor of Mission 
San Diego dc Alaca, were planning a trip to Europe soon. The Dixons were 
ready to go again, so they invited the two holy men to ride along with them on 
Vernon's Falcon. Thus in May 1985 Maher and Eagen were entertained at 
Vernon's expense in Paris, London, and Rome — where they in turn arranged 
the Dixons' introduction to the Pope. The trip was charged to Vernon Savings, 
and Dixon justified the expense as entertainment for Vernon customers. But 
what customers? The bishop and the monsignor? Perhaps the notation was simply 
a rare moment of candor by Don and Dana, who most certainly were Vernon's 
best customers." 

Vernon's records showed that Don and Dana went to Europe again in 1985. 
This time they visited Ireland, Great Britain, Switzerland, Italy, Spain, France, 
and Denmark. The stated purpose for the trip was to conduct business,^ of 
course, but the visible spoils were $489,000 worth of furniture and antiques, 
paid for by a Vernon subsidiary but delivered to the Dixons. There was also a 
1951 Rolls-Royce Don picked up in London. (Vernon Savings reimbursed the 
Dixons over $68,000 for the European trips they made between 1983 and 1985.)* 

Don had loved cars since he was a kid, and in May of 1985 he had Vernon 
buy Symbolic Motors, a Rolls-Royce and Ferrari dealership in affluent La Jolla, 
just south of Del Mar. Rare and expensive autos stood reflected in the polished 
tile floors, each car exhibited like a rare gem in its own section of the display 
room. Dixon justified the purchase of the dealership by saying that it would 
offer Vernon an opportunity to "break into the consumer lending market." 

The Dixons had moved from the $1 million Solano Beach house to the $2 
million Del Mar house in late 1984, but within months they were ready for 
another move up. In 1985 Dixon decided to build a Spanish-style manor house 
in the ultraexclusive Rancho Santa Fe subdivision, a few miles inland from Del 
Mar in the coastal hills. The land alone, 16 hillside acres, cost Vernon $5 
million, regulators complained. The mansion, as he and Dana envisioned it, 
would sprawl across five acres like a white stucco Spanish castle. It would have 


a six-car garage and a two-stor\' stable. Several man-made waterfalls would grace 
tlic grounds. Dana would do the decorating, starting — an PHLB examiner later 
charged — with the $489,000 worth of furniture the Dixons had just brought 
home from Europe and 514 yards of carpet they ordered for $26,000. 

Dixon wasn't alone in his fearless pursuit of the good life. It seemed all 
of Dallas was on a roll by 1985 and no one was having more fun than young 
Edwin T. McBirney III at Sunbelt Savings and Loan. McBirney was chairman, 
CEO, majority shareholder, and ruler of the Sunbelt fiefdom, and Sunbelt 
was a star sapphire in the Texas crown of thrift debauchery. While careening 
his institution toward staggering losses that culminated with a shortfall of $1.2 
billion, the darkly handsome McBirney threw some wild and crazy parties. 
Regulators said that in 1984 and 1985 Sunbelt spent over $1.3 million on 
Halloween and Christmas parties. One Halloween McBirney entertained at his 
palatial North Dallas home dressed as a king. He served broiled lion, antelope, 
and pheasant and had a fog machine going for atmosphere. The following 
Halloween he expanded to a warehouse that he decorated like a jungle, and 
he wore a pith helmet, khakis, and binoculars. And, yes, the elephant was 
real — until a magician he had hired made it disappear. That Christmas he 
decorated a warehouse like a Russian winter, with strolling Russian peasants 
and a bear. 

Gifted with a retentive mind and a sharp intelligence, McBirney often had 
groups of borrowers in several rooms at one time at Sunbelt Savings' office in 
North Dallas. Cigar in hand, he could circulate between rooms and never miss 
a nuance or forget a concession. When a deal couldn't be structured traditionally, 
"figure a way to paper it" was often his response, observers said. If a borrower 
didn't qualify for a loan, find someone to "kiss the paper" for him." More than 
one man who had tried to negotiate a deal with McBirney called him a shark. 

Sunbelt had seven aircraft, one of which he bought with financing provided 
by Don Dixon's Louisiana friend, Herman K. Beebe. McBirney flew business 
associates on trips to Las Vegas, Kona, and Capo San Lucas. He liked to gamble, 
and associates told the story of the trip to the Dunes in Las Vegas when he bet 
$15,000 on one hand of 21 and won. Then he went over to the craps table and 
won again. And again. 

"It was amazing," said a fellow junketeer. "I couldn't figure out how he 
always won." 

Sunbelt later sued McBirney, claiming that in three years Sunbelt spent 
$61,800 for him on Christmas gifts (including $54,000 at Neiman Marcus), 
$15,100 for lodging on trips, $100,000 for meals (including $57,000 at 
Jason's — no wonder they didn't mind taking the time to cover his table with 
paper so he wouldn't scribble his deals on their tablecloths), $22,000 at the 

Dark in the Heart of Texas ■ 207 

Texas Stadium, and $70,000 for limousine service. According to several firsthand 
accounts, McBirncy produced w horcs for his customers the same way an ordinary 
businessman miglit spring for hnich. A visiting developer told us he checked 
into his Dallas hotel room and found a hooker sitting on his bed. 

"Hello." she said. 

"What arc you doing here?" he asked. 

"I'm for you," she purred. 

Just then the phone rang. It was McBirncy. "Get my little gift?" he asked. 

McBirney prowled one of Dallas's hottest night spots, the Rio Room — along 
with such jet setters as Sammy Davis, Jr., and Adnan Khashoggi — where $1,000 
bar tabs were common and the big sellers were $1 ^0 bottles of champagne. Real 
estate night was Thursday, and many a deal was celebrated or even consummated 
then. Wheeler Dealers, a 1963 spoof of Texas millionaires that starred James 
Garner and Lee Remick, showed up on late-night TV and some thought it was 
a perfect parody of the times, 20 years later. Dallas reporter Byron Harris wrote 
that a fellow who had been celebrating an especially lucrative deal stumbled out 
of the Rio Room into the parking lot and kicked in the door of a Rolls-Royce 
just for fun. 

Vernon Savings, State/Lubbock, and Sunbelt were only three of dozens of 
Texas thrifts running amok at the end of 1985. Deregulation was barely three 
years old but the level of greed and corruption at Texas thrifts had reached 
biblical proportions. Questions were being raised about Commodore Savings, 
Western Savings, Independent American Savings, Sandia Savings, Lamar Sav- 
ings, Paris Savings, Midland Savings, Mainland Savings, Stockton Savings, 
Summit Savings, Continental Savings, Mercury Savings, Ben Milam Savings — 
the list went on and on. Texas was rocking and rolling to the deregulation rag. 

"I remember one closing we had," said a real estate salesperson, describing 
how they flipped land to raise its value. "It was in the hall of an office building. 
The tables were lined all the way down the hall. The investors were lined up 
in front of the tables. The loan officers would close one sale and pass the papers 
to the next guy. It looked like kids registering for college. If any investor raised 
a question, someone would come over and tell them to leave, they were out of 
the deal." At the end of the day's flipping, huge loans, based on the inflated 
values created by the flip sales, would be taken out on the properties. 

Texas was careening out of control, but Ed Gray returned from his Christmas 
break in January 1986 refreshed and optimistic that his direct investment reg- 
ulation and the limit on growth were bringing excesses like those in Texas to a 
halt. He couldn't have been more wrong. In 1986 the lid would blow off the 
Texas pressure cooker. 

Gray's illusions were shattered when reports from the field in Texas indicated 


that the wildcat thrifts had found ways around most of Gray's roadblock regu- 
lations and were falling deeper into the morass. 

Gray told us later he was surprised to find that the people in charge of 
supervising Texas thrifts, Joe Settle at the Dallas Federal Home Loan Bank and 
L. Linton Bowman III, the Texas savings and loan commissioner, were more 
sympathetic to the Texas thrift owners than to the Federal Home Loan Bank 
Board.'" Gray claimed Settle was "too chummy" with the Texas thrift establish- 
ment, and he told a congressional subcommittee that under Settle's administra- 
tion, supervision of Texas thrifts had been virtually nonexistent. Gray brought 
in veteran thrift regulator Roy Green to baby-sit the Dallas district bank, and 
he needed someone with top-notch credentials to run Green's sup>er\'isory staff. 
Gray's first order of business in 1986 was to get someone with a strong stomach 
in that job. Green recommended Washington veteran Joe Selby. 

About that time Selby was seriously thinking about quietly slipping into 
semiretirement. A Texan by birth, he was thinking about returning to his home 
state to look for some light work, or maybe to do some part-time jobs for the 
International Monetary Fund. He was 54 years old and had already served 31 
of those years as a regulator in the office of the comptroller of the currency. His 
forte was the supervision of large national commercial banks. 

Gray had met Selby at a luncheon in Boston before Christmas. Gray liked 
what he saw and told Selby he'd be delighted to have him in the FHLBB camp 
if he ever decided to leave the comptroller's office. From Gray's vantage point 
Selby had all the right qualifications for the Texas job. He was a native of 
Ganado, Texas, 90 miles west of Houston, so the Texas cowboys couldn't accuse 
him of being a Yankee troublemaker. As a teenager he'd worked as a teller in 
his father's bank. Then he went on to earn a banking and finance degree from 
the University of Texas. His co-workers in the comptroller's office had affec- 
tionately nicknamed him "The Great White Father" — a reference to his snowy 
white hair. In January, Green visited Selby in his Washington office and asked 
him to be executive vice president and head of supervision at the Dallas FHLB. 
Selby accepted. 

Selby moved to Dallas to assume his FHLB position in May 1986. By that 
time the worsening financial condition of the state's oil and real estate economy 
was on the front pages almost daily. But the ups and downs of local economies 
didn't concern Selby. Such cycles were as perennial as the grass. Anway, he 
soon discovered that the problems facing Texas thrifts were rooted in a much 
more troubling soil. 

It was only about a month after Selby got on the job that he met Don Dixon. 
Dixon strolled arrogantly into Selby 's office one Monday morning wearing his 
permanent California tan, beige suit, and alligator shoes. Roy Green and Selby 
greeted Dixon and asked him what he had on his mind. Green had briefed Selby 

Dark in the Heart of Texas • 209 

about the deep concerns he had about Vernon, so botli men were shocked when 
Dixon confronted them with liis plan. Dixon had lieard all about "the troubles" 
the Bank Board was having with insolvent thrifts, and he was there to help them 
out. He wanted them to allow \''crnon to absorb about ten ailing thrifts and, in 
so doing, create one giant $9 billion superthrift. 

Selby later said that he and Green fought to keep a straight face while Dixon 
smoothly explained his plan. They thanked him for his concern over the FSLlC's 
well-being and told him they'd get back to him. When Dixon left the two men 
burst out laughing. Was this guy for real? Ironically, two years later, in 1988, 
the Bank Board's own plan for dealing with failed thrifts in Texas would closely 
resemble Dixon's plan. Regulators called Dixon's idea crazy. They called theirs 
"The Southwest Plan." 

Dixon was among the most visible of the ostentatious S&L rogues, and he 
justified his good life by pointing to Vernon's profits. But those profits were built 
on shifting sand. For example, Vernon had loaned millions to Dondi Residential 
Properties, Inc. (DRPl) to build condos all over Dallas and the suburbs. By 1985 
DRPI (or "Drippy," as it was called) was stuck with over 700 unsold units 
(nicknamed "the Drippies") on which, examiners warned, Vernon faced a po- 
tential $11 million loss. But Vernon kept right on loaning and DRPI kept right 
on building. 

Vernon also made huge loans to favorite developer friends of Dixon's like 
Jack Atkinson, who borrowed tens of millions of dollars from Vernon ($56 million 
of which went into default, bank records showed). Atkinson owned his own 
Gulfstream 50 jet, which Dana Dixon was rumored to prefer because she liked 
its gray leather interior. 

To keep those loans from going into default, Vernon Savings — and sister 
thrifts like State/Lubbock and Sunbelt — made the loans large enough to allow 
for an interest reserve that could cover the payments for a year or so. When that 
money ran out Vernon renewed the loan. And each time Vernon renewed a 
loan it was able to book new loan fees. If examiners were due for a visit, Vernon 
officers farmed out ("participated") really bad loans to other, like-minded thrifts 
where the loans would be out of sight until the examiners left. 

In June 1985 representatives from 19 Texas savings and loans met secretly 
in Houston to discuss what mutual actions they could take to keep regulators 
off their backs. According to a report in the Houston Pos^ the S&L executives 

Selling loans ("participations") to other S&Ls to get rid of dead wood 
and to avoid Ed Gray's growth limits. 


Using straw borrowers to avoid loans-to-one-borrower limits and to avoid 
Ed Gray's growth limits. 

Selling loans to each other, with agreements to buy them back later. 

Sources told the Posf the effect of these actions would have been to "move 
bad loans around to hide thcni from regulators and make the S&Ls appear to 
be in better financial shape than they actually were. " (Among those attending 
the meeting held in Houston were Terry Barker as well as representatives from 
Vernon, Western, Lamar, Mainland, and Continental Savings. Of the approx- 
imately 19 thrifts represented at the meeting, about 15 would later fail.)" 

Even after the loans went into default, thrift officials had ways of postponing 
the day of reckoning. When \''crnon officials compiled the thrift's delinquent 
loan list for regulators at the end of 1985, for example, they reported $36 million 
in delinquent loans. The accurate figure, regulators later learned, was $212 

"It was just a big Ponzi .scheme that probably only had four good years in 
it to begin with," a Dallas contractor later explained, referring to Texas savings 
and loan operations in the early 1980s. Someday, when the loans finally went 
into default, a chain reaction would spread the damage from one Texas thrift 
to the next and into other states as interlocking loans and participations, buy- 
back agreements, and letters of credit all began coming home to roost at once. 

Since even the best juggler reaches the limit of how many balls he can keep 
in the air at one time, by 1986 no one around Vernon or its subsidiary operations 
had a clue as to how many balls they were juggling or where those balls were. 
When the balls started hitting the ground like hailstones in a Texas hailstorm, 
startled regulators slapped Vernon with a cease-and-desist order that instructed 
Vernon Savings to clean up its act. Dixon knew that a cease-and-desist order 
was a serious step in a process that led to almost inevitable seizure by the 

A few days after he got the order in June 1986, Dixon called his employees 
together for a party in a hangar at the company's facility at the Addison Municipal 
Airport. Employees of Vernon were accustomed to parties at company expense 
so they probably didn't find Dixon's sudden party announcement particularly 
unusual. They were greeted at the hangar with a full bar and hors d'oeuvres. 
After healthy rounds of drinks and small talk among Vernon's baby-blue air 
force, Dixon called for everyone's attention. 

Employees gathered around their leader, expecting the usual Dixon pep talk. 
Instead he shocked them with the news that he would be withdrawing from 
active involvement at Vernon. He would still hold control over Vernon's stock 
but would not be around the office anymore. Some employees who attended 
the party said they greeted Dixon's announcement with a secret sigh of relief 

Dark in the Heart of Texas • 211 

They hoped that once the colorful Dixon was gone so, too, would be the 

In the same month McBirney got the same idea, and he resigned as president 
of Sunbelt Savings. And the U.S. attorney indicted Terry Barker and his seeing- 
eye attorney, Larry Vineyard, for fraud and conspiracy in connection with 
an exchange of loans they had made with a banker friend.'- June 1986 marked 
the climax of the most dramatic five years in the history of the Texas thrift 

Even these better-late-than-never actions were no match for the harvest of 
woe regulators would now face. Events were tumbling out of control in Texas, 
and every agency with an interest in what was happening was scrambling to 
catch up. In July, Ed Gray rounded up examiners from around the country and 
sent a "hit squad" of 250 specially trained examiners into Texas to help the 
Dallas FHLB investigate thrifts suspected of being insolvent. But as pressure was 
put on the Texas thrift industry by the small army of FHLBB examiners, Gray 
and Joe Selby became increasingly unpopular with both crooked thrift owners 
and honest ones. The crooks feared exposure and indictment while the straight 
thrift owners feared that the write-downs (reductions in the inflated values crooked 
thrifts were assigning to their Texas real estate holdings and loan portfolios) 
would depreciate the value of everyone's real estate holdings and hurt the in- 
nocent as well as the guilty. 

In August, Nancy Reagan received an anonymous letter saying that Ed Gray 
was a "Nazi" and that the Bank Board was using "gestapo tactics" in its supervision 
of Texas thrifts. The president's wife, who was still friendly with Gray, forwarded 
the letter to him for his growing collection. 

Larry Taggart (Gray's former friend and California savings and loan com- 
missioner), working as a lobbyist and consultant for Don Dixon and other thrift 
owners," sent an angry six-page letter to White House Chief of Staff Don Regan 
with copies to Senator Jake Garn and Representative Doug Barnard. In the letter 
Taggart complained bitterly about Gray and his policies. Taggart had broken 
with Gray long ago, as he had sided with California's go-go thrifts against Gray's 
re-regulation of the industry. They openly feuded in the press. Their relationship 
had hit rock bottom when Gray forced Charlie Knapp, a close friend of Taggart's, 
out of EGA in August 1984.''' But nothing Taggart had said before compared 
with the vitriol of this letter. 

Taggart's letter all but demanded that Don Regan kick Gray out of office. 
Taggart wrote that "the attitude of the FHLBB and Chairman Gray has been 
contrary to that of the Reagan administration." He noted that Gray's regulation 
of the industry was "likely to have a very adverse impact on the ability of our 
party to raise much needed campaign funds in the upcoming elections. Many 


who have been ven' supportive of the Administration arc involved with S&'Ls 
which are cither being closed by the Bank Board or threatened with closure ..." 
Taggart also stated that Gray's contention that there was widespread fraud oc- 
curring at thrifts was not true and that fraud was a factor "at very few of the 
thrifts" being closed by the Bank Board. Taggart parroted the Texas thrift industry- 
party line . . . any problems the thrift industry was having were due to the 
temporary downturn in the state's oil-based economy and Ed Gray's regulations, 
not fraud." 

Around the time that Taggart's letter reached Washington, Selby testified 
before the Bank Board, seeking approval to close Dallas-based Western Savings 
and Loan, owned by Jarrett Woods. Board member Don Hovde asked Sclby 
whether the mess in Texas was the fault of the economy or the fault of the 
people who had run the thrifts down there. Selby didn't have to search for an 

"I think a majority are a result of poor underwriting and basically it 
might be said that even if the economy were good, these loans would never be 

Selby's straight talk and tough enforcement policies were not winning 
him any friends in Texas. Between May 1986, when he went to work at the 
Dallas FHLB, and December 1986, the Dallas FHLB placed at least 100 
supervisory actions on thrifts. By September constituents' cries of anguish were 
ringing in Texas congressmen's ears, and then House Majority Leader Jim Wright 
(D-Texas) called Gray over to his office. "■ When Gray and his party arrived he 
was surprised to find Congressmen Steve Bartlett (R-Texas), [ohn Bryant (D- 
Texas), and Martin Frost (D-Texas) lounging about. Gray felt like he was being 
ambushed. He was right. 

The meeting, on September 15, lasted almost two hours, though Wright 
had to leave unexpectedly after half an hour. The congressmen minced no 
words. "Gestapo tactics — bullying examiners — hit squads — Joe Selby's a finan- 
cial Rambo — what the hell are you trying to do to Texas?" They all took their 
turn beating on Gray, parroting complaints they'd heard from such financial 
wizards as Don Dixon, Tyrell Barker, and Ed McBirney. Like a beaten boxer 
in the tenth round. Gray absorbed each punch without complaint and tried to 
reassure them that the FHLBB was being circumspect and cautious and fair. 
Gray said he left the meeting deeply depressed. He was amazed that the con- 
gressmen had so little understanding of what the Bank Board was up against in 
trying to protect the FSLIG fund. 

A few days later Wright'^ called Gray to say that he'd lieen contacted by 
fellow Texan Craig Hall, who was having problems renegotiating loans with a 
thrift that the Bank Board had taken over, Westwood Savings and Loan in 
California."^ Wright asked Gray if he would check into the matter, and he 
particularly complained that Scott Schultz, the regulator responsible for West- 

Dark in the Heart of Texas '213 

wood, was not as "flexible or understanding" as he should be. Gray told Wright 
he'd check out the Hall loans and see what all the flap was about. 

Hall was a slick young Dallas real estate syndieator who owned one of the 
nation's largest private real estate limited partnership firms and was one of the 
biggest owners of real estate in Texas. He controlled at least one thrift and 
had interests in others. He had been hit hard by the downturn in the Texas 
economy and was now stuck with nearly $500 million in syndication loans he 
couldn't repay. He claimed that so many of the loans were from S&Ls that if 
he went bankrupt, 29 thrifts would immediately be insolvent. Gray asked Bank 
Board negotiators to do what they could for Hall, but Gray later noted, "If a 
piece of real estate was only worth $1 million and an S&L had it on its books 
as having a value of $2 million, then what were we supposed to do? Look the 
other way?" 

On September 26 Wright tightened the screws. Gray's bill to replenish the 
FSLIC fund, seriously depleted after covering so many costly thrift failures, was 
scheduled to be considered by the House soon, but Wright removed it from the 
calendar. Through scuttlebutt and media reports Gray and his people got what 
they later said they considered to be the clear message that Wright would take 
care of the FSLIC recapitalization bill (the "recap") when Gray took care of 

Gray had begun to feel desperate about the recap bill. a year earlier 
he had realized that the FSLIG would not have enough money to close and 
liquidate all the insolvent thrifts that regulators were now identifying. When a 
thrift was liquidated all its deposits up to $100,000 each had to be repaid to 
depositors, and that money came out of the FSLIC fund. A single medium- 
sized thrift liquidation could cost the FSLIC $500 million. There had already 
been several, and the fund would soon be running on empfy. It was down to a 
reserve of only $2.5 billion to cover deposits of $800 billion in 3,249 S&Ls. At 
the time 252 thrifts, with assets of almost $95 billion, were in serious trouble. 
If the FSLIC fund did not have enough money to close insolvent thrifts, they 
would be left open and continue to lose millions of dollars a month. The specter 
of insolvent S&Ls continuing to operate around the country had driven Gray 
to propose the recap bill in the spring of 1986. Now the year was almost over 
and Gray's apprehension had increased daily.''' 

For the sake of the recap bill. Gray decided to replace Schultz at Weshvood 
with someone he hoped would be more acceptable to Wright. He selected a 
highly respected official from the FHLB in New York ("I felt that I would 
not be caving in by asking a person of very high stature in the Federal Home 
Loan Bank system to come out and do this, " Gray later explained to a congres- 
sional investigator) and instructed him to see if there was any way to justify 
restructuring Hall's loans. Schultz's replacement ultimately did agree not to 
foreclose on the $200 million in Hall syndication loans at Weshvood Savings, 


thereby giving him some breathing room. Wright told the Associated Press that 
Gray's action "saved [Hall's] business, saved several S&rLs, and saved the market 
from panic." 

The move was very unpopular at the FHLBB, however. Replacing an official 
in Schultz's position (conservator of an insolvent thrift) just wasn't done. It was 
a slap in the face to the KHLBB's enforcement staff, and the Bank Board chief 
of staff later said, "We didn't like what we did. . . . [W]e felt terrible about 
the choices posed for us and I personally took a great deal of time to torment 
over the fact that from our perspective ... we [felt] we crossed a line bcKveen 
what we felt was permissible or not. On the other hand . . . there was a very 
difficult problem [getting Wright to release the recap bill] that we were trying 
to address." 

Gray called Wright to report that the Hall matter had been tended to and 
asked for a private meeting with the majoritv- leader. Gray had decided that 
Wright's problem was that he just didn't understand how the thrift regulatory 
business ran, so on October 3 he went to Wright's office to give him what Gray 
called a "civics lesson on FSLIC." The meeting lasted about 20 minutes. Gray 
told Wright the FSLIC was almost broke. 

"We need your support on the recap, " he said. 

Wright once again mentioned that people he trusted in Texas were saying 
Gray and Selby were acting like the gestapo in dealing with insolvent S&'Ls 
down there. Once again Wright likened the FHLBB to the Nazis and added 
that Texas examiners were operating like hit squads in his home state. He said 
he was afraid the FHLBB would use the extra money from the recap bill to crack 
down unfairly on Texas S&rLs and cause needless bankruptcies. Sitting on a 
couch in Wright's office. Gray told Wright point-blank, "Whether you like it 
or not, there are too many crooks in this business." 

In parting, and with an eye toward pr\ing the recap bill loose. Gray told 
Wright to let him know if he ever needed anything further. Three days later 
Wright released his hold on the recap bill. 

On October 10 Wright wrote to Gray saying that he had received a letter 
from Scott Mann, chairman of CreditBanc Savings in Austin,-" that detailed 
some "very inappropriate actions by regulators." Wright said he'd been hearing 
many such complaints since his discussions with Gray had "come to the public's 
attention." Wright was especially concerned, he wrote, about Mann's detailed 
charges that Selby and other regulators in the FHLB of Dallas had unreasonably 
harassed CreditBanc and were threatening to declare the thrift insolvent without 
good reason and in spite of an agreement reached between CreditBanc and Texas 
Savings and Loan Commissioner Bowman. Mann had complained in his letter 
to Wright, "The FHLB of Dallas had become a high-handed adversary of Texas 
savings and loan associations and has effectively usurped the authority of the 

Dark in the Heart of Texas • 215 

Texas Savings and Loan Commissioner to regulate state-chartered institutions 
in Texas." 

Wright wrote to Gray, "This kind of high-handed and arbitrary attitude can 
only create fear, mistrust and a climate of great instabilit>. " He said tlic regulators' 
actions, as described by Mann, "would seem clearly outside the realm of ac- 
ceptable regulatory behavior. . . . Sonic in the regulatory force seem not to 
understand the fundamental principle that it is government's aim and objective 
to save legitimate businesses, not to destroy them." Wright later said the letter 
was intended as an expression of concern about the Texas S&'L industry as a 
whole, not a particular S&L, and was "a very common thing" for a congressman 
to send to "a bureaucrat." 

This time Gray could not deliver. CreditBanc was too far gone. By the time 
Gray wrote back to Wright four months later, after what he called a lengthy 
investigation, he reported that CreditBanc was nearly insolvent because of "deep- 
seated financial problems, most of which have surfaced since Mr. Mann acquired 
control of CreditBanc in July 1985" and as "a direct result of the failure of 
[CreditBanc's] management to invest in safe and sound assets." Regulators later 
forced Mann to resign and reported CreditBanc had a net worth of minus $216 

The political pressure from Texas thrift owners intensified daily. On October 
21 Wright hosted a catered luncheon at the Ridglea Country Club in Fort 
Worth, arranged by Wright's good friend and business partner Fort Worth 
developer George Mallick. The purpose of the get-together was to give about 
20 of Wright's S&L constituents a chance to recount directly to the majority 
leader the unspeakable things the Bank Board, Joe Selby, and Ed Gray were 
doing to their lives. Advance word of the luncheon meeting spread quickly 
throughout the Texas thrift community and soon Mallick was besieged with 
phone calls from people who wanted to attend. By the time Wright got to the 
country club he faced a veritable lynch mob of 1 10 angry Texas S&L executives 
and developers. 

As lunch got under way each stood and told his or her own horror stories. 
They said that Ed Gray and Joe Selby were kicking their teeth in and forcing 
them to list their real estate at its true current value rather than at its projected 
inflated value. They complained that they were being vilified and accused of 
being corrupt. Local sheriffs were being used to escort deposed S&L chiefs out 
of their institutions right in front of the whole world. A minister who was building 
a nursing home complained that he was almost finished with the project but 
couldn't complete the building because S&L regulators had told thrifts to stop 
lending to him. After the meeting a Wright aide reported that Wright's office 
was besieged with calls from other people in the industry who had heard that 
Wright had expressed an interest in their problems. 


A week or hvo after the Ridglea meeting, Wright called Gray again. 

"Congressman Jim Wright's on the plione for you, Mr. Gray." 

Lighting a cigarette. Gray wondered what it would be this time. He took a 
deep drag and punched the lighted button on the phone. 

This time Wright asked Gray to meet with his friend Tom Gaubert, 
who owned Independent American Savings Association in Irving, between 
Dallas and Fort Worth, and who was also under the regulators' gun — in January 
1986 the Bank Board had banned him from ever operating an FSLIC-insured 

Scrappy Tom Gaubert reminded many of George C. Scott with a beard. He 
had a gruff voice and he smoked cigars, a I'exas-type man's man, a real roll- 
up-the-sleeves kind of guy. Gaubert was a tough negotiator. He had been waging 
a war against S&L regulators since they had criticized his management of In- 
dependent American and his involvement with what appeared to be a land flip 
in connection with a loan from Capitol Savings and Loan in Mount Pleasant, 
Iowa. He had agreed to resign in December 1984. Independent American had 
then continued under the leadership of Gaubert's brother and others until May 
1986, when the FHLBB installed a team of its own. But Gaubert went on 
fighting for reinstatement. -' 

Gaubert told us that he believed most of the troubles he and his friends were 
having were because regulators had first encouraged developers to own savings 
and loans in the early 1980s to revitalize the industry, and then they suddenly 
panicked and switched gears four years later, throwing the industry into a tailspin 
by "re-regulating" it. Everything he had done, he said, had been approved by 
regulators who had encouraged him every step of the way. It was a familiar 
theme. Without exception, virtually every deposed thrift officer we spoke to, 
beginning with Erv Hansen at Centennial, claimed that deregulation was a trap, 
a trick, that there never had been any real deregulation of the thrift industry, 
and that thrifts were in trouble because they believed what regulators had first 
told them, only to have the rules changed later and the ground pulled out from 
under them. (No doubt much of that was true. In the early 1980s regulators did 
encourage many of the behaviors that they later forbade. ) Tom Gaubert made 
no secret of his hatred for thrift regulators. In his mahogany-paneled office, 
adorned with stuffed birds, he kept a toy shooting gallery where he had tacked 
pictures of regulators Ed Gray, Rosemary Stewart (who headed the Bank Board's 
enforcement division in Washington), and Roy Green (president of the FHLB 
in Dallas). 

The Wall Street Journal reported that in 1985 Gaubert had organized a 
political action committee for Democratic candidates that raised $101,000 
from 66 Texas thrift owners, officers, borrowers, and wives. Donations came 
from Gaubert, Dixon, McBirney, other Vernon Savings and Sunbelt Savings 

Dark in the Heart of Texas -217 

officers, and Dallas developers who had borrowed hundreds of millions of 
dollars from the clique of Texas S&Ls. The Wall Street Journal said Sunbelt 
Savings may have paid fees to its directors to subsidize their contributions to the 

Besides raising funds for his little thrift owners' defense fund, Gaubert had 
other fund-raising positions that gave him even more political pull. In 1986 
Gaubert was treasurer of the Democratic Congressional Campaign Committee, 
when Representative Tony Coelho was chairman, and in his 12 months as 
treasurer he raised $9 million for House candidates, according to Newsweek 
magazine." hi 1987 he was chairman of an event that grossed $1 million for 
his good friend Representative James Wright, who became speaker of the House 
in January 1987. 

Gaubert told us, in fact, that it was he who arranged Wright's 1984 flight 
from Los Angeles through Dallas to Shreveport and back on the Vernon Savings 
jet, a flight that would make headlines a few years later and cause Wright 
considerable political embarrassment. Gaubert said he arranged Wright's flight 
on the Vernon plane because other transportation was not available on short 
notice. He said he had always expected Vernon Savings to bill Wright for the 
flight. Wright did not know at the time that he was on a Vernon plane, Gaubert 

"Bullshit," said an FBI agent when we told him Gaubert's story. 

When it came to being the queen bee of Texas thrift activitists, no one could 
hold a candle to Tom Gaubert. And he had a real friend in Jim Wright. When 
Wright spoke to Ed Gray on Gaubert's behalf, Wright told Gray he had known 
Gaubert for a long time and had total confidence in him. Selby wanted to boot 
Gaubert out of Independent American Savings permanently, and Wright com- 
plained that Gaubert was being treated unfairly. Gaubert had assured Wright 
he had done nothing wrong. Instead, the Bank Board had violated its rules and 
abused its authority, Gaubert said. He ridiculed the regulators who removed the 
Dixons and McBirneys and then caused even more losses when they themselves 
tried to run the S&Ls." 

It was highly unusual for a congressman to intervene directly in FHLBB 
regulatory matters, as Wright was doing, and it was against Bank Board rules 
for Gray to meet with anyone involved in action before the Board, but since 
Congress had not yet acted on the recap bill and the bill was therefore still 
vulnerable to Wright's displeasure. Gray agreed to meet with Gaubert and listen 
to his complaints. For over two hours Gaubert bent Gray's ear. According to 
Gray, Gaubert alternately buttered Gray up and evoked Wright's name to remind 
Gray who his patron was. Gaubert asked Gray to review Gaubert's removal as 
CEO of Independent American. Gray bit his tongue and agreed — for the recap, 
he told himself. Gaubert left Gray's office a happy man.^'' 


Later Gaubert told us that he advised Wright not to pass the recap while 
Gray was in office. "I told the Speaker it would be stupid to give Ed Gray $15 
billion. He'd just piss it away."-^ 

Not long after Wright called Gray on behalf of Tom Gaubert, he called 
Gray yet again to repeat his concern for the way thrifts in Texas were being 
treated. He especially complained to Gray about what he considered to be )oe 
Selby's heavy-handed methods. He asked if Gray could get rid of the man. Gray 
refused. When reasoning failed him Wright turned to hardball again. He said 
he had heard from his people in Texas that Selby was a homosexual and that 
he was hiring homosexual lawyers to work for the Federal Home Loan Bank in 
Dallas. Again Wright wondered pointedly if Gray couldn't find someone more 
suitable for the job. 

Gray replied, "I feel he is doing a fine job in Texas and I see no justification 
for firing him." 

Wright had to call his friends in Texas and tell them he had been unable 
to dislodge Selby from his job at the FHLB of Dallas. 

Later, when we asked Wright in writing about the above incident, he replied 
by having his attorney write to McGraw-Hill, the publisher of this book, and 
deny that any such conversation took place. Wright's attorney wrote, "Mr. Wright 
does not and would not presume to tell the head of any agency who should be 
hired or fired." He wrote that Wright had no specific knowledge concerning 
Selby's personal life "and never would express an>' judgments about him without 
such knowledge." 

The 1989 report of a congressional ethics probe of Speaker Wright, however, 
concluded that the conversation did indeed take place. The report noted that 
Selby's sexual orientation, whatever it might have been, was "completely irrel- 
evant to his qualification for employment in the Federal Home Loan Bank 
System." Every credible witness who knew Selby "had only the highest praise 
for the man's character and ability " and none believed "the incredible rumor 
embraced by Wright" that Selby "had established a ring of homosexual lawyers" 
to do the FHLB's super\isory work in Dallas. The report concluded that Wright's 
request that Gray get rid of Selby "greatly exceeded the bounds of proper congres- 
sional conduct. . . . An attempt to destroy the distinguished career of a dedicated 
public servant because of his rumored sexual orientation or because of a wild 
accusation hardly reflects creditably on the House. Such an attempt is a direct 
violation of House Rule XLIII." 

Selby continued to be a particular target of Texas thrift owners, who viewed 
him as a colonial governor representing the imperialist power in Washington, 
Ed Gray.-*" If Wright had made life hot for Ed Gray in Washington, Wright's 
friends in Texas turned Joe Selby's life into a living hell. Soon after Selby returned 

Dark in the Heart of Texas ■ 219 

from a Washington meeting with the Bank Board, in which he had obtained 
approval for the closure of Jarrett Woods's Western Savings and Loan in Dallas, 
one of the Dallas FHLB examiners noticed his home phone was not functioning 
properly. He unscrewed the mouthpiece and discovered the problem — an elec- 
tronic listening device — a bug. Selby knew he had annoyed some powerful 
people, but not until now had he imagined how deep those waters were. Selby 
wasn't taking any chances. He had his office and the entire supervisory floor 
swept for bugs. None were found. 

A few weeks later Selby received a call from a Dallas savings and loan 
executive whom he respected." 

"Joe, can we get together for lunch? I have something I think you should 
know, but I don't want to talk about it on the phone." 

Over lunch the bank president recounted a strange occurrence. 

"I was attending a thrift conference last week and walked in on a meeting 
full of Texas savings and loan guys from around town here. I only picked up 
the end of the conversation, but I can tell you they were talking about hiring 
somebody to kidnap you, Joe." 

Selby thought for a moment. If someone had told him that story a few weeks 
earlier, he would have considered them nuts, but now, after the phone bug, he 
wasn't so sure. "Don't tell me any more. I don't want to hear about it," Selby 
told his friend. "I don't even want to know who was at the meeting." Selby said 
later he felt like he was in the cross hairs of a rifle scope. 

"God, it was an electric atmosphere during those days," Selby told us. "1 
feared for my mental and physical health. I was afraid for my own life. There 
were bad guys robbing millions from S&Ls. ... I had no idea I'd run into the 
crooks I ran into when I got down to Dallas." 


The Last Squeezing of the 


Don Dixon had stepped down at Vernon after the FHLB issued its cease-and- 
desist order. He no longer participated in the thrift's day-to-day activities, but 
he still controlled Vernon's subsidiary Dondi Financial. Though gone ftoni the 
office, his presence continued to be felt in the vault. After clearing out at Vernon, 
Don Dixon began to cash in his Southern California empire. Since Vernon 
Savings would no longer be paying the bills, something certainly had to be done 
with all his homes there: the Solano Beach house, the Del Mar house, and the 
Rancho Santa Fe home that he was building. He tried to find someone to buy 
the Solano Beach house (the only one of the three that Vernon Savings was not 
on the hook for). Jack Atkinson, who regulators said borrowed (with his affiliates) 
over $56.2 million from Vernon, told an FHLB examiner he paid the Solano 
Beach rent for a while. So did John Riddle, a de\eloper who bank records showed 
had borrowed about $10 million from Vernon. 

Our old friend Charles Bazarian showed up next, renting the home for 
several months during 1986. Bazarian actually made two offers to buy the home 
from its owners after Dixon stopped making the monthly payments. In March, 
Bazarian offered $1.75 million, and he said Paris Savings and Loan (in North 
Dallas around the corner from Vernon Savings) had agreed to finance the pur- 
chase. However, Dixon's man Friday in California said Dixon told him the 
Bazarian offer was bogus, intended simply to buy time for Dixon.' 

Bazarian's heart attack that year sent Dixon scrambling for another "buyer," 
but Bazarian came back in September with another offer, $1.45 million. Paris 
Savings backed out of the deal, however, when they read in the National Thrift 
hlews that Bazarian had been indicted in September for the Florida Center Bank 
scam with Renda and Rapp. Eventually Dixon lost the home. 

As for the Del Mar house, in June 1986 Dixon negotiated its sale to a 
company owned by Bruce West, another major Vernon borrower. An FSLIC 


The Last Squeezing of the Grapes -221 

lawsuit revealed tiiat Dixon arranged to have Vernon loan West $2.8 million 
to buy the house, but first Dixon removed the expensive artwork, for whieh 
Vernon had paid $900,000.- After the sale of the Del Mar house the Dixons 
continued to occupy it for about six months, paying West's company, Lawton 
Industries, $7,100 a month rent. During that time the Dixons abandoned hope 
of moving into the Rancho Santa Fe mansion, under construction a few miles 
away, and in December 1986 the Dixons moved into a home in nearby Laguna 
Beach that was owned by Jack Franks, a California loan broker who would later 
be indicted with Tom Nevis at State/Corvallis. ' 

hi July Dixon held an auction at Symbolic Motors in La Jolla and sold 19 
vintage cars. Fight of them belonged to him, he said, including a classic Hispano- 
Suiza, a stunning 19iO Duescnberg, and a 1936 Mercedes. Regulators said the 
auction grossed $2.3 million, of which Dixon pocketed $1.8 million. Symbolic 
Motors paid all the auction fees, and it (and, therefore, Vernon Savings) lost 
$204,000 on the auction. 

After Dixon withdrew from Vernon Savings, some of his loyal cadre must 
have known their days were numbered. In August 1986 they made some stra- 
tegic moves for what they apparently hoped would be a clean getaway. Their 
bonus and "bean" commissions, over a million dollars of which was being 
held in bonus accounts at Vernon Savings, would be forfeited if they quit (or 
if the thrift were seized). So, the FSLIC charged, they took out personal loans 
in the exact amounts contained in their bonus accounts and never made a 
single payment on the loans. In effect, they withdrew the money from their 
bonus accounts by defaulting on the loans. Attorneys for the FSLIC would 
later tell a federal judge of their amazement at the boldness displayed by the 
Vernon executives: 

But even as it became increasingly difficult to continue the cover-up and 
as the investigator's net began to tighten, the Senior Officers schemed 
one last desperate maneuver to divert another $1,211,792 into their own 
pockets. . . . 

The persistence and boldness of the Senior Officers in putting this last scheme 
into effect, after the commencement of a special investigation by the FHLB, 
is truly breath-taking. 

Appearing later for depositions, in response to the attorney's charges, all of the 
senior officers refused to answer questions. (By preSs time, three had been indicted 
on bank fraud charges, two of whom had pleaded guilty.) 

By December 1986, the dozens of examiners sniffing around in Vernon's 
books began to piece together a frightening picture. What emerged was a $1.7 
billion financial institution in worse shape than the Alamo after the smoke 
cleared. Dead and dying properties and loans littered Vernon's portfolio. Vernon 


assets — office buildings, shopping centers, condo projects — hemorrhaged before 
their eyes. At the same time new casualties staggered in the door every time the 
examiners glanced up. Losses mounted by the hour. Regulators started calling 
the thrift "Vermin Savings." Roy Green, president of the Dallas FHLB, told 
congressional investigators that Vernon was the worst-run, worst-managed de- 
bacle he'd ever seen in the thrift industry. 

Vernon Savings had reported a $17 million negative net worth in November 
1986. A month later, as examiners got a better handle on the situation, that 
figure rose to $350 million. Then regulators discovered that Vemon had sold 
more than $449 million in loans to other thrifts, to get the loans off of Vernon's 
books, and had promised to buy many of the loans back if the borrowers ever 
defaulted. That meant Vernon was still on the hook for those loans, but if 
Vernon were ever liquidated by the FSLIC and unable to uphold its end of the 
participation agreements, thrifts aro\jnd the country would take direct losses 
every time one of the loans they had bought from Vernon turned sour. The 
health of a number of S&Ls around the country depended upon Vernon's 

In December 1986 regulators decided to seek a consent-to-merger agreement 
from Vernon.'' The agreement would impose certain restrictions on management 
and authorize the FSLIC to arrange a merger or sale of the thrift. It also would 
give regulators the right to replace Vernon's directors and officers. 

Dixon saw control of Vernon Savings slipping away from him, and he didn't 
intend to give up his thrift without a fight. He tried to contact Representative 
Jim Wright.^ When Wright didn't return his call, he got in touch with Rep- 
resentative Tony Coelho and Coelho called Wright's right-hand man John Paul 
Mack,*" who got Wright to call Dixon." Wright later told congressional inves- 
tigators that Dixon said, "Look, they are getting ready to put me . . . and all 
the stockholders completely out of business. ... If I can be given a week, I 
have located a source of income, a source of loans, financing in Louisiana . . . 
a person who will take over all the nonperforming notes and provide capital to 
continue and redo our op)eration here, if they will just give me that time." Dixon 
asked Wright to intercede for him with Gray, and near Christmas 1986 Wright 
called Gray at home in California. 

According to Wright, he said, "Ed. I don't know anything about Vernon 
Savings and Loan. I don't know if it's valid or not. I don't know if it's 
meritorious. But the man claims he's being kicked out of business. He's got 
a week or three or four days that he can save it and avoid foreclosure. Why 
don't you look into it?" 

Gray told Wright he thought there must be a misunderstanding. Only the 

The Last Squeezing of the Crapes • 223 

Bank Board could authorize closing an institution and no such authorization 
had been given. He agreed to find out what was going on. 

Later Gray would lament over the Christmas call: "I have done things as 
a results of his [Wright's] calls that 1 would not iiave done and never did 

But Gray kept his promise and called Roy Green at the FHLB in Dallas. 
Green said regulators planned to seek a consent-to-merger agreement, not a 
closing, and Gray and Green called Mack to explain the difference. They told 
Mack a eonscnt-to-merger agreement wouldn't affect the Louisiana business- 
man's ability to invest in Vernon, and Gray said if there was an investor foolish 
enough to commit $300 million to a massively insolvent institution, the Bank 
Board uould certainly be interested. 

On January 2 the Dallas FHLB received four proposals to invest in Vernon 
and rejected them all. In the case of the Louisiana group, it proposed to put up 
no cash whatsoever. 

Jim Wright was elevated to the post of speaker of the House of Represent- 
atives, the third most powerful post in government, in January 1987. Gray's 
recap bill then was truly in the hands of a powerful hostile force. Roy Green 
and Joe Selby decided to take a crack at Wright next. They knew better than 
anyone else what was yet to come in Texas, and they felt Wright had to be made 
to understand that their examiners were only doing what needed to be done. 
The examiners were not victimizing innocent constituents. Until Wright un- 
derstood the situation they felt he would continue to punish the Bank Board by 
failing to support the critically needed recap bill. "1 wanted the speaker to 
understand exactly what was going on in Texas," Green said. Selby wasn't so 
sure the meeting would do any good. Some thought Wright's actions grew more 
out of self-interest than out of ignorance of the facts. But Selby reluctantly agreed 
to accompany Green. 

Ed Gray said he was not invited to attend the February 10 meeting because 
Wright didn't want him there. The six who did go included Green, Selby, 
and William Black, who was the FSLIG's aggressive young deputy director. 
Wright invited his Texas developer friend and partner George Mallick, George's 
son Michael, and others to observe the meeting. Wright had asked Mallick 
to write a report on the cost of cleaning up all the insolvent S&Ls and the 
reasons for the problems, and Mallick was presenting his completed report 
today. *" Black later told us he and the other regulators were astounded to see 
the Mallicks and the others in the room. He said their presence made it vir- 
tually impossible to discuss highly confidential regulatory matters openly with 

Wright trusted Mallick's views. He and Mallick had been partners since 


the 1970s, according to published accounts, and Wright's wife, Betty, received 
$18,000 a year as an employee of a firm they jointly owned. A Justice De- 
partment official told the Washington Times the relationship between Wright 
and the Mallicks appeared to be "a classic gratuities case . . . official acts 
prompted by financial favors," and it later became one focus of an ethics probe 
of the speaker. 

The February 1987 meeting in the speaker's office began with Roy Green 
and Joe Selby explaining the serious problems they faced in Texas. Green told 
Wright that the innuendos about gcstapo tactics in Texas were nonsense. Reg- 
ulators were just doing their jobs. 

Wright was unmoved. If they were so smart, Wright wanted to know, why 
couldn't the FSLIC handle these problems more creatively? He felt the FSLIC 
was forcing thrifts into insolvency by requiring them to take huge write-downs 
on property they owned. 

"Why can't you guys work out some kind of deals with these people?" Wright 
wanted to know. 

There's disagreement on just who brought up Vernon at the meeting. Wright 
claimed he didn't. Black said he most certainly did, others said Green did. One 
thing was clear — Wright was furious with Gray, whom he felt had lied to him 
about Vernon. 

"When 1 talk to the head of a federal agency and he tells me something, 
you know, I believe him," Black quoted Wright as saying. "And 1 asked Gray 
when they were going to shut down Vernon Savings and Loan and he personally 
assured me that they were not going to do that, and then I discover that you 
did just exactly that, and the very [same] day." 

Black realized that the speaker just didn't understand the difference between 
a consent-to-merger agreement and a seizure. 

Black was an articulate, liberal Democrat in his late thirties. A striking man, 
with a full head of red hair and a red beard, he was well versed on the FSLIC's 
growing crisis. Unlike Gray, there was nothing folksy about Black. He was 
professional and blunt. 

"You don't seem to understand what's going on down there," Black said to 
the speaker. 

"1 don't understand what's going on down there? " Wright boomed, his face 
turning bright red. "I'm the speaker of the House, goddamn it. Goddamn it, I 
listened to you people and now you're going to listen to me. You're talking 
semantics to me, jargon, and I don't like it.'"* 

Wright complained bitterly that it was Ed Gray who didn't know what he 
was doing, especially in Texas. Black, choosing his words more carefiilly this 
time, tried to explain to Wright that Vernon was hopelessly insolvent, that it 
would cost hundreds of millions of the FSLIG's dollars — maybe as much as a 
billion — just to clean up after Don Dixon. 

The Last Squeezing of the Grapes • 225 

Wright turned to Joe Selby. 

"You're the guy who's carrying the big hammer down there. They're scared 
of you," Wright said, cocking an angry eye at Selby. Selby wasn't about to get 
into a shouting match with Wright, so he just didn't reply. (Friends later said 
Selby told them he was afraid of the speaker.) The meeting lasted about an hour, 
but Wright remained unmoved and nothing was accomplished. Two weeks after 
the meeting, Roy Green threw in the towel and resigned from the Dallas Bank 
Board. He later denied that his resignation had anything to do with his meeting 
with Wright. 

The meeting with Green and Selby was good background for Wright for 
what happened six weeks later. On March 27, 1987, the inevitable could be 
delayed no longer and the FHLBB ordered that Vernon Savings be closed. When 
the extent of the damage at Vernon began to leak out in the press, the seizure 
became a major embarrassment to the speaker. His press secretary quickly issued 
a statement: 

"The Speaker has no personal knowledge one way or other of this or any 
other individual savings and loan. . . . The Speaker's aim from the beginning 
has been to make sure that depositors are protected and that sound and salvageable 
private businesses are not forced into bankruptcy or foreclosure whenever that 
can be avoided." 

A full-fledged damage-control operation swung into action to protect the 
new speaker from himself. Representative Frank Annunzio (D-III)'" rushed to 
Wright's side and told the Washington Post, "If this [the closing of Vernon] is 
an attempt to embarrass Jim Wright then Mr. Gray is lucky that the Speaker is 
an advocate for the homeless because after June, when Mr. Gray is out of a job 
(Gray's term as FHLBB chairman was due to expire in June 1987) he may be 
sleeping on a grate." 

Regulators went on the offensive. They seized thrift after thrift in Texas in 
the months that followed the closure of Vernon. But it wasn't the end, not by 
a long shot. They began the task of dismantling the rogue thrifts one piece at a 
time, dissecting them, like a mortician would dissect a cadaver to determine the 
cause of death, reading out the list of maladies and malignancies as they were 
found. In Vernon's case the list was a long one, just part of which was a long 
list of loans FSLIC compiled that were in default at the time of the takeover. 
For us some of the names were familiar ones: John Atkinson and related com- 
panies, $56.2 million; Dixon-related companies, $44.9 million; Larry Vineyard, 
$16.3 million; John B. Anderson, $11.7 million; John Riddle, $9.7 million; 
Tom Gaubert, $6.76 million; Bruce West, $4.85 million; Charles Bazarian and 
related companies, $4.6 million; Frank Domingues, $995,000; Durward Curlee, 
$502,600; Jack Franks and related entities, $300,000; Tom Nevis, amount un- 


In a case where staggering figures and tall tales were the order of the day, 
it was hard to pick one figure that summed up Vernon, but if we had to choose 
one it would be this; By the time Vernon failed on March 20, 1987, an un- 
believable 96 percent of all its outstanding loans were in default. 96 percent! 
Virtually every loan Vernon had made was a bad loan." 

On April 27, 1987, the FSLIC filed a civil racketeering lawsuit against 
Dixon, Dondi F'inancial, and a baker's do7xn of Vernon former officers, charg- 
ing that they had looted Vernon of more than $540 million. The suit alleged, 
among qther things, that they had made loans of up to $90 million each to 
friends and business associates without, the suit said, any "reasonable basis 
for concluding the loans were collectible." At the time the civil suit was the 
largest in the FSLIC's history. Then regulators faced the long and messy job 
of trying to clean up the books, repay depositors, and dispose of Vernon's 
overencumbered real estate in a Texas market that had gone bust. Cleaning 
up Vernon would ultimately cost $1.3 billion. Later Vernon CEO Woody F. 
Lemons was indicted for bank fraud and two of the six senior officers named 
in the FSLIC suit pleaded guilty to bank fraud. Spokesmen said the investi- 
gation was continuing. 

The day after the FSLIC sued Dixon, et al, Speaker Wright and the House 
Banking Committee Chairman St Germain did a public about-face and. in what 
The New York Times characterized as "a startling reversal," agreed to support 
the $15 billion recap bill. Wright later said his sudden decision had nothing to 
do with Vernon Savings. He said Secretary of the Treasury James Baker had 
met him in Fort Worth on April 24 and personally asked him to support the 
$15 billion bill. 

While the F'SLIC was filing its half-billion-dollar lawsuit, Dixon was going 
into his lame-bird routine and declaring bankruptcy. He claimed to have lost 
$100 million and to be fiat broke, and he warned creditors that they "couldn't 
get blood out of a turnip. " He estimated his income in 1987 would be a modest 
$104,500, compared to $1.9 million in 1986 and $2.9 million in 1985. Dixon 
appeared at a bankruptcy court hearing in June 1987 in Southern California 
with Dana clinging nervously to his arm. When the judge questioned him about 
the extravagant life-style he had led while he controlled Vernon Savings, Dixon 
tried to paint a picture of prudence. He left spectators shaking their heads when 
he insisted that his Ferrari was not an extravagance. 

"It was a family Ferrari," he told the court. How so? Well, he explained, 
because it had an automatic transmission. Laughter spread throughout the court- 
room. As Dixon answered the bankruptcy court judge's questions, he glanced 
out into the audience, where he spotted a familiar face, Dallas reporter Byron 

The Last Squeezing of the Grapes ■ 227 

Harris, who had closely covered Dixon's rise and fall. Dixon smirked, as if to 
say "What a pain in the ass, huh?" Dana, on the other hand, looked terrified 
by the whole public spectacle. She held tightly to Don's arm as they sat at the 
witness table and afterward in the hall as they passed the phalanx of reporters 
and television cameras. 

The "family" Ferrari was not the only asset Dixon's 85 creditors wanted to 
get their hands on. There were the custom-made shotguns, now valued at 
$25,000 apiece, and Dana's $75,000 diamond solitaire ring. And the $31,000 
worth of French wines Dixon had picked up on his European tours. All were 
listed in the bankruptcy filings. 

In an attempt to gauge the depth and breadth of Dixon's five-year spending 
binge, his own attorney compiled a list of about 400 people and 1 50 banks and 
S&Ls Dixon had done business with ("every one he'd ever driven by," quipped 
an associate) who might need to be notified about any action taken in his 
bankruptcy case. On the list were many names familiar to us: Larry Vineyard, 
Tyrell Barker, Jack Atkinson, former U.S. Secretary of the Treasury John Con- 
nally, Ben Barnes (former lieutenant governor of Texas), Robert Ferrante, Jack 
Franks, John Riddle, Bruce West, Charles Bazarian and his company, CB 
Financial. There were also several familiar savings and loans; Sunbelt, Key, 
Paris, and Vernon. 

And there on the list was R. B. Tanner, 71, founder of Vernon Savings. 
Dixon continued to promise Tanner he would pay him the more than $2 million 
that Dixon still owed him for Vernon Savings and that the Tanners had counted 
on for their retirement, but it was hard to see where the money would come 

"We are hurting terrifically," Mrs. Tanner told us, and R.B.'s health hadn't 
been the same since Vernon's collapse. But they found strength through doing 
mission work for their church. "R.B. lived a life of integrity," Mrs. Tanner said 
proudly, and that was something, at least, that Don Dixon could not take from 
them. Months later the Tanners were on television, praying for Don Dixon's 

Bad as things were, Vernon wasn't an exception in Dallas, it was the rule. 
FBI officials scoffed at Federal Home Loan Bank Board statements that the 
losses were attributable to the oil recession. Vernon, for example, was already 
in trouble in 1983, over two years before oil prices collapsed. Government 
auditors and Justice Department investigators estimated that there were $15 
billion in losses in institutions in the Dallas area that were under criminal 
investigation. In Houston half the failed institutions there were under inves- 
tigation as well. Every time investigators looked at a failed thrift, they found 

"My god," an overwhelmed FBI agent said to us, "the only thing that is 

228 • INSIDE )OB 

ever going to get nie out of here is the statute of limitations." (The statute of 
limitations for bank fraud is five years.) 

"This is the biggest Keystone Cops debacle to happen to U.S. financial 
institutions since the Great Depression," one veteran thrift executive, hired by 
the FSLIC to help untangle the mess, told The Wall Street Journal. "I'hc failure 
on the regulatory side is even.' bit equal to the failures committed by the other 
side. " 

"If you know the Vernon story," a FSLIC attorney told us, "you know three 
percent of what hapjjened in Texas. " 


Thus read newspaper headlines across the United States in mid-August 1987. 
The U.S. Department of Justice had convened a special task force of 20 FBI 
agents, two assistant U.S. attorneys, four IRS agents, 14 Justice Department 
lawyers and special prosecutors, and at least one federal grand jur\'. They seized 
the records of about 400 players in the Dallas S&L game, involved in 25 to 35 
thrifts, and they announced that the largest white-collar crime probe of its type 
in U.S. history was under way. Their investigation, they said, could take from 
two to five years to complete. 

The Dallas Times Herald obtained a copy of the list of 400 jjeople whose 
records had been seized while investigators repeatedly stressed that seizure of 
a person's records did not indicate that person himself was under investigation. 
On the list were many names familiar to us: Jack Atkinson, Tyrell Barker, 
Herman Beebe, Mitchell Brown, Durward Curlee, Don and Dana Dixon, Jack 
Franks, Tom Gaubert, Craig Hall, Morton Hopkins, Ed McBirney, Tom 
Nevis, John Riddle, Larry Vineyard, Jarrett Woods. The list also included some 
heavyweight Texans, including Richard Strauss, the son of Robert Strauss, the 
former national Democratic Party chairman; Ben Barnes; John Connally; for- 
mer Texas Savings and Loan Commissioner L. Linton Bowman, III; and Gene 
Philips, president of Southmark, a $10 billion Dallas-based investment com- 
pany. An eerie silence fell over what had been a mecca for wild, free-wheeling 
S&L action. 

Many suspected the task force investigation was no more than a temporary 
inconvenience for Texans. As Molly Ivins, columnist for the Dallas Times 
Herald, once said, "When they crap out, Texans are \er\- good-natured about 
it and just start over with something else. It's the game they like ..." 

Texas differed only in scale from what we had discovered virtually every- 
where else in the country, even in places where the only oil being pumped 
was at the corner gas station. Texas had attracted almost every swindler in the 
country who was traveling the thrift circuit because Texas thrifts wheeled and 
dealed like no others in the nation. Texas, we had discovered, was the most 

The Last Squeezing of the Grapes • 229 

glaring example of how ultraliberal state thrift regulations, coupled with new 
federal powers and FSLIC deposit insurance, produced a machine that sucked 
in deposits from across the nation and channeled them into a network of excess, 
fraud, and corruption the likes of which had no equal in the history of this 


The Godfather 

We had spent several months investigating the Texas savings and loan industry 
when a source slipped us a startling document. It was a copy of a series of secret 
reports prepared in 1985 for the comptroller of the currency.' The report had 
been ordered by the comptroller in order to "determine the breadth of [Herman] 
Becbe's influence or control o\cr financial institutions." We knew of Bcebes 
involvement in banking through his credit life insurance business. We also knew 
he had bankrolled Dixon and Barker when they bought Vernon and State/ 
Lubbock and he had loaned money to McBirney to buy an airplane for Sunbelt 
Savings. But Becbe's interest in financial institutions apparendy went far deeper 
than that. 

The 22-page report listed over 100 banks and savings and loans that the 
comptroller's investigators suspected were either directly or indirectly controlled 
by Beebe or over whom he had some kind of influence. Listed among the thrifts 
they suspected Beebe of controlling were, of course, Vernon and State/Lubbock. 
The report also outlined a complex structure of personal relationships, corporate 
shells, and stock partnerships that secretly underlaid ownership of dozens more 
institutions throughout Texas, Louisiana, Colorado, California, Mississippi, 
Ohio, and Oklahoma. And beneath it all, the report alleged. v\as the guiding 
hand of Herman K. Beebe. When we scanned the list of thrifts and banks, we 
saw many that we knew had failed or were on the verge of insolvency. Suddenly 
Herman Beebe appeared to be in the class of Mario Renda and Charles Bazarian. 
If the report was correct, Herman Beebe was a veritable godfather of thrifts and 
banks. - 

Herman Beebe in 1987 was 60 years old. For over 20 years he had been 
quietly manipulating financial institutions for his own benefit and the benefit 
of a close-knit circle of influential friends. We learned that Beebe was a business 
associate of the most powerful men in Louisiana and Texas, and we heard the 


The Godfather ■ 231 

rumors that he was also associated with one of the Mafia's most powerful god- 
fathers, Carlos Marccllo. 

His influence in banking circles was so pervasive by the mid-1980s that he 
could be connected in some way to almost every dying bank or savings and loan 
in Texas and Louisiana, yet few people had ever heard his name — that is until 
U.S. Attorney Joe Cage set out to change all that. The confrontation between 
)oe Cage and Herman Bccbe was a clash played out in Louisiana courtrooms 
between 1985 and 1988. It would match in significance Mike Manning's pursuit 
of Mario Renda. 

Herman Bccbe grew up in Rapides Parish in central Louisiana. Beebe was 
a conuuon name in the Arkansas, Louisiana, and Texas area, and Herman came 
from solid rural stock. In 1943 he entered Northwestern State University in 
Natchitoches, just a few miles from home, and swept the floors of Caldwell Hall 
for his room and board. But World War II intervened, and he had to give up 
school for Navy shipboard dutv' in the Pacific. After the war he finished college 
at Louisiana State University in Baton Rouge, and the same year, 1949, he 
married Mary. They would have four children: Easter Bunny, Pamela, Ruth 
Anastasia, and Herman, Jr. Beebe had majored in agricultural education, and 
he worked as an assistant county agent in northern Louisiana until called into 
the NavT reserves during the Korean War. While in the Navy he decided to sell 
insurance when he got out. 

In 1956 he moved back to Rapides Parish and within two years he was vice 
president of Sa\ings Life Insurance Company in Alexandria (eventually one of 
the largest mortgage life insurance companies in Louisiana). In 1961 he started 
his own company, investing in motels, mostly Holiday Inns. He originally called 
his company American Motel Industries, but gradually his investments spread 
from motels to insurance to nursing homes and finally banking. American Motel 
Industries became siiuply AMI, Inc. Over the next 25 years he would build 
AMI into a multimillion-dollar conglomerate only to see it crumble as U.S. 
Attornev Joe Cage probed Beebe's business dealings and bombarded him with 
indictments and back-to-back investigations. 

Whatever Horatio Alger elements there may have been in Beebe's success 
story, investigators said he joined the dark side early. In January 1965 the Se- 
curities and Exchange Commission accused Beebe and a partner of withholding 
important information when they tried to sell AMI stock.' 

Beebe shrugged off the SEC judgment and went right back to building his 
empire. Nearly two years later, in October 1966, he made a decision that would 
change his life. It would also change the fortunes of more than 100 banks and 
thrifts over the next 20 years. In 1966 Herman Beebe bought his first bank, 
Bossier Bank & Trust, in Bossier City, Louisiana. As AMI had become the 


cornerstone of his business empire, so Bossier Bank & Trust would become the 
cornerstone of his banking empire. On a roll, he parlayed that purchase into 
eight more banks in Louisiana, Oklahoma, and Texas. Beebe had come up with 
a way to create his own captive customer base for his insurance company. By 
owning his own banks Beebe could require the banks' prospective borrowers to 
buy ami's credit life insurance. No insurance, no loan, though it might not be 
so crudely put. 

Beebe quickly became one of Louisiana's major employers and a one-man 
conglomerate. Soon he was in demand. The mayor of Shreveport, Louisiana, 
120 miles northwest of Alexandria, tirelessly wooed him, even attending AMI 
board meetings. He urged Beebe to consider the benefits of basing his company 
in Shreveport. Beebe agreed — after all. his bank. Bossier Bank &• Trust, was in 
Bossier City, a suburb just across the Red River from Shreveport. In 1971 he 
made the move. For the next 14 years he would work and live in Shreveport, 
200 miles due east of Dallas. 

Even as Beebe's star was rising in Louisiana, he was getting some unasked- 
for attention outside the state. Two thousand miles away, on the West Coast, 
the San Diego police were looking into Beebe's growing contacts there and 
notified the Metropolitan Crime Commission in New Orleans. The San Diego 
authorities reported that they had discovered that Beebe was negotiating to pur- 
chase a casino. His partners in the deal were familiar to the San Diego police, 
who considered them undesirables. 

About the same time the rumors began to circulate that Beebe was "con- 
nected" in some way to Carlos Marcello, the powerful New Orleans Mafia boss. 
Among Beebe's growing businesses were his nursing homes. Carlos Marcello 
liked nursing homes too. In fact, in 1966 he had been arrested in a New York 
restaurant with East Coast Mafia boss Carlo Gambino and Florida boss Santo 
Trafficante, and he had told authorities he was in New York to arrange financing 
for a nursing home. Aaron Kohn, who was on the Metropolitan Crime Com- 
mission at that time, said one of Marcello's "messenger-boy attorneys" was seen 
serving as a courier between Marcello and Beebe in the mid- 1 970s. ^ Later Beebe's 
attorney would tell us vehemently that Beebe absolutely did not have any as- 
sociation with Carlos Marcello or any organized crime figure. "^ 

Whatever relationships might have been developed imdcrground. Beebe was 
forging powerful political connections above ground. In the early 1970s he and 
former Texas Lieutenant Governor Ben Barnes develof)ed a complex business 
association, the tentacles of which would be found 1 5 years later entwined in 
the Texas thrift crisis. 

When Ben Barnes was only 22 he was elected to the Texas House of Rep- 
resentatives. For 1 1 years he was one of Texas's most up-and-coming young 
politicians. In 1968 he was nominated for lieutenant governor and became the 
first candidate in Texas history to receive two million votes. He was lieutenant 

The Godfather ■ 233 

governor from 1968 to 1972, but his political career ended after his name was 
involved in a bank and stock fraud scandal. 

In 1971 a group of Texas banks were looted by a network of businessmen 
who borrowed money from the banks and used it to buy and sell stock from 
firms that belonged to Texas businessman Frank Sharp.'' Ben Barnes had owned 
stock in one of the companies under investigation by the SEC, according to the 
Texas Obsener, and he had had loans at Dallas Bank & Trust, owned by Sharp 
(Barnes and Beebe later bought the bank). Though Barnes was never indicted, 
the Texas media speculated that his involvement may have raised questions in 
the voters' minds. He placed third in the 1972 race for the Democratic guber- 
natorial nomination. 

In July 1973 Beebe and Barnes began to form banking and insurance as- 
sociations,^ and by mid-1976 they controlled or had major influence over 19 
banks and savings and loans in Texas and Louisiana. 

Dallas, where Beebe's Savings Life had an office, was the center of the pair's 
business activity together. They often held their meetings in a North Dallas 
apartment, and it was sometime during 1976, Beebe later said, that Ben Barnes 
introduced Beebe to aggressive young Dallas developer Don Dixon. 

Financially, Beebe and Barnes did very well together. The Dallas Morning 
News reported that by 1976 Beebe claimed a net worth of $8.2 million, and 
Barnes' prospects had certainly improved — from a net worth of $100,000 when 
he left the political arena in 1972 to $5.4 million in 1976. Unnoticed, they 
quietly went about the business of amassing a banking and insurance empire. 
Unnoticed, that was, until August 29, 1976, when Dallas Morning News re- 
porters Earl Golz and Dave McNeely shattered the silence: 




So read the main headline on the Golz/McNeely series. The lead paragraph 
of their story could have run almost unchanged in any Dallas newspaper during 
the savings and loan crisis ten years later: 

"A multimillion dollar looting of state banks, with links to political figures 
and possibly to organized crime, could cause several state banks in Texas to fail 
unless severe corrective measures are taken, according to informed sources." 

The gist of the stories was that a network of 14 businessmen had borrowed 
money to buy Texas banks and thrifts, used those banks and thrifts to get loans 
to buy others, and so on, in pyramid fashion. Then, once they had acquired 
the institutions, they had used depositors' money to make loans to themselves 
and their friends.'* Among the men named in the story were Herman Beebe and 
Ben Barnes. 


Aside from the financial wheeling and dealing outlined in their Dallas Morn- 
ing News scries, Gol/, and McNccly revealed disturbing information about some 
of the men in the network they said officials believed were looting state banks." 
Beebe, they said, had "drawn the interest of several federal investigative agencies, 
which have reported that he has had associations v\ith indi\iduals who have 
organized crime coimcctions." 

Again the allegation: "One agency has reported that Beebe has had frequent 
contact with one of the personal attorneys of reputed New Orleans Mafia boss 
Carlos Marcello." And; 

"Usually reliable federal sources report that Bossier Bank & Trust is suspected 
of being a conduit for funds skimmed by organized crime from Las Vegas 
gambling receipts and placed in foreign bank numbered accounts." 

Two of the men named in the Morning News series, Carroll Kelly and David 
Wylie, would later get financing from Beebe to take o\er Continental Savings 
and Loan in Houston, according to court documents. A Houston dentist (who 
was a former investor in two thrifts merged to form Continental) said in an 
affidavit that one of the men's former partners told him New Orleans Mafia boss 
Carlos Marcello controlled Continental Savings through Beebe. '" Officials with 
Continental Savings denied the institution had anything to do with anybody in 
organized crime. (Continental Savings failed in October 1988.) 

Ben Barnes was in Reno, Nevada, negotiating to build a Holiday Inn at 
Lake Tahoe, when the 1976 Dallas Morning News series began. He was li\id. 
and with great fanfare and bluster ("I am sick and fired of having my personal 
business affairs subjected to continuous harassment. My family and I have en- 
dured enough persecution from the awesome power of a giant newspaper") he 
sued the Morning News for $20 million. 

Within a few days Beebe followed with a $12 million suit. But for all their 
threats, the cases never came to court. After a lot of jawboning attorneys for the 
defense said Barnes and Beebe abandoned their monetary demands in return for 
the newspaper's promise that it would not release any of the information it had 
collected on them and would seal the files. Barnes told us he did not pursue 
his suit because he could not show he had been damaged financially by the 

But that was by no means the end of the story. A House subcommittee," 
chaired by Representative Fernand St Germain (D-R.I.), held hearings in San 
Antonio later that year (1976) to investigate the closing of Citizens State Bank 
in Carrizo Springs and what became known as the rent-a-bank scandal. The 
hearings dragged up all the dirt again and added more.'- A former executive 
vice president of Citizens State Bank testified at the hearing that an associate 
had attended a meeting with Beebe and Harper and later told him "that Beebe 
was supposedly connected with the Mafia. " Beebe denied the rumor. 

In the documents filed as part of the 1976 congressional hearings was a letter 

The Godfather • 235 

from loan broker Donald E. Luna to Barnes and Beebe about a loan Luna was 
arranging for an associate of theirs. We remembered Don Luna: Ten years after 
he wrote this letter to Barnes and Beebe, he would be indieted with Cardaseia 
at Flushing Federal for allegedly extorting $1.75 million from a Swiss developer. 
(Sometime during those ten years, federal authorities said, Luna had been eon- 
victed of running a confidence scam.) Cardaseia was cleared of the charge and 
Luna was awaiting trial as this book went to press. 

As with the congressional hearings on brokered deposits involving Mario 
Renda, the Citizens State Bank hearings in 1976 had virtually no impact. Beebe 
continued to build up AML Inc. , from his corporate headquarters in Shrcveport. 
But the people of Shrcveport began to notice that Herman Beebe had changed. 
In 1979, saying he needed to devote more time to his business, he stepped down 
as chairman of the board of Bossier Bank & Trust (though he maintained his 
ownership) and seemed to withdraw from the mainstream of daily commerce. 
He stopped going to civic and social functions in Shrcveport, and he sank into 
the anonymity of corporate AML Inc. He spent his days doing million-dollar 
deals concluded in a matter of minutes and sealed with a handshake. His habit 
was to rise before dawn and work late. 

An associate later described to us Beebe's way of doing business: "He just 
kind of walked on the edge of fire, just defying people. He lived by the sword 
and he died by the sword. But I don't think he was a crook. I do think he violated 
federal banking laws and savings and loan laws, as most people do who do a lot 
of creative things, so he was guilty of that, sure." 

Beebe adopted a jet-setting life-style, flying out of nearby Shrcveport Mu- 
nicipal Airport for business meetings around the country or taking an entourage 
by limousine to Dallas, which was a straight three-hour shot west on Interstate 
20 from Shrcveport. When he wasn't engrossed in business he was at home with 
his family at their private compound near AMI headquarters, a woodsy secluded 
colony of stately Southern mansions, pine trees, and vast gracious lawns. Beebe's 
home in the family compound was described in the Shrcveport Times as an 
n,000-square-foot, $1 million Colonial mansion complete with swimming pool, 
tennis courts, and private pond. There were seven bedrooms, 24-karat-gold-leaf 
chandeliers from Spain, separate barbecue and smokehouse, bronze-trimmed 
winding staircase in the foyer, murals on the dining-room walls, and a six-car 
garage. There were also separate, more modest houses for the Beebe children 
— in the half-million-dollar range. 

Beebe maintained a second home at La Costa Country Club in Southern 
California. La Costa was built by Rapp's buddy Moe Dalitz and others in the 
mid-1960s with $97 million from the Teamsters Central States Pension Fund. 
Beebe had owned property there for 17 years and was an established member 


of an important social and business circle." Most notably, Pete Brewton re- 
ported in the Houston Post, he was a business partner with Scott Susalla, 
whose father, Edward D. "Fast Eddie" Susalla, was a general partner in La 
Costa.''' Beebe and Susalla owned a loan brokerage and real estate firm called 
TLC (Texas, Louisiana, California). Susalla also worked with Don Dixon on 
condo deals in the La Costa area. (In 1985 Scott Susalla would plead guilty 
to possession of cocaine in one of the biggest drug busts in Southern Califomia 
history. Federal authorities had accused him and about 100 others of imfxirting 
a large percentage of Peru's cocaine into the United States. ) 

But Beebe's primary interests were still in Louisiana and Texas, where he 
continued to expand. When Congress announced that it intended to deregulate 
thrifts — taking the first step with the Depository Institutions Deregulation and 
Monetary Control Act of 1980 — Beebe immediately saw the possibilities. Real 
estate in Texas was red-hot, and deregulated thrifts could make more commercial 
real estate loans than ever before, with fewer restrichons than ever before. Beebe 
began to "diversify," investing in more S&Ls, and he helped his friends do the 
same. Word got around that anyone who needed money to get control of a thrift 
should see Beebe. 

"He was the man," said an FBI agent later. "Herman was the man to see," 
a thrift regulator agreed. Thus, Beebe became known to a handful of the ob- 
servant as "the Godfather of Texas Savings and Loans." 

Among the authorized visitors to AMI headquarters and the Beebe family 
compound during this time was Don Dixon, who had become a close family 
friend and with whom Beebe had made several investments, including a Holiday 
Inn in Shreveport. Dixon, about ten years younger than Beebe, had adopted 
the older man as a paternal role model, even calling Beebe "Papaw." (Some 
people would later speculate that Dixon's high-living life-style at Vernon was 
just an attempt to outperk his mentor, Papaw.) Dixon brought his friend Tyrell 
Barker into the Beebe clan. 

Later U.S. Attorney Joe Cage said, "Beebe created Barker and Dixon for his 
benefit, their benefit, everybody's benefit but the American taxpayers. " Both Dix- 
on's and Barker's thrifts sold Beebe's credit life insurance policies to their borrow- 
ers. Beebe's right-hand man at AMI, Dale Anderson, later said that AMI netted 
$2. 5 million in two years through Vernon's sales alone. For a time Beebe even 
kept a two-room suite in the Vernon Savings building. Anderson explained how it 

"We were very careful about how we worded it. If a borrower said he'd talk 
to his own insurance man, we'd say, 'Fine. That's probably where you need to 
get your loan.' " 

Beebe, Dixon, and Barker also networked with the burgeoning S&L com- 
munity in Texas, arranging millions of dollars in loans for themselves, loans 
that regulators would later claim weren't always repaid. 

The Godfather ■ 237 

"Basically it all boiled down to back scratching," said the U.S. attorney who 
later prosecuted Barker. Tom Nevis's testimony, about a time when Barker 
approached him for a loan, showed how the back scratching worked: 

"He (Barker) said, 'You owe me a loan. Try to get me a loan.' ... I never 
crossed Barker. . . . Barker was always saying, 'You do this and I'll help you 
out.' ... He done a lot of that."'' 

A deal negotiated with a Beebe-controlled bank or .savings and loan, ac- 
cording to former Beebe associates, might work something like this: Someone 
who wanted a real estate development loan would be required to borrow more 
than he needed and to use the excess as Beebe directed (to pay off a loan that 
Beebe owed or that was owed to him, or to buy stock in a Beebe bank). And 
once the development was completed, a Beebe associate might buy it with another 
(overfunded) loan from a Becbe-controlled institution. The whole process re- 
sembled a Ponzi scheme (that could only last as long as real estate values were 

"What happened was that people who came to us for money had to buy 
something," a Beebe associate told the Dallas Morning News. 

Beebe built a number of important relationships, each serving a particular 
need, each giving Beebe access to an important arena. With Barnes, Beebe was 
plugged into old-Texas banking, insurance, and political circles. With Dixon 
and Barker, he was part of the wild-'n'-crazy thrift owners of Dallas. "• With 
Louisiana Governor Edwin Edwards and Judge Edmund Reggie, Beebe would 
gain entry into the highest circles of political power in Louisiana. 

Edwin Edwards was an ambitious politician, and beginning in 1954 he would 
hold political office in Louisiana for almost 30 years. He started as a city coun- 
cilman in Crowley and subsequently served in the Louisiana Senate and the 
U.S. House of Representatives. He was governor of the state of Louisiana from 
1972 to 1980, took a break for one term, and served again from 1984 to 1988. 
Until he lost his bid in 1988 for an unprecedented fourth term as governor, he 
had a campaign record of 16-0. 

Edwards was a flamboyant gambling man, a self-admitted "proud and ego- 
tistical person" who reportedly used to boast that the only way he could lose an 
election was "to be caught in bed with either a dead girl or a live boy." He 
gambled in Las Vegas under aliases like T. Wong, and U.S. Attorney joe Cage 
said Edwards and Beebe traveled together to Las Vegas and Southern California. 
For two years during Edwards's four-year sabbatical from the governorship (1980 
to 1984) he was on Beebe's payroll, earning $100,000 a year working for AML 
(Later Cage would say the accommodation seemed to exhibit "the hallmark of 
influence peddling.") 

When Edwards was governor of Louisiana his administration became em- 


broiled in the federal government's pursuit of Carlos Marcello, boss of the New 
Orleans Mafia. In 1981 Charles Roemer, then Edwards's commissioner of ad- 
ministration, and Marcello were convicted of federal charges of racketeering. 
The prosecution played in court some tap)es they had made in 1979 of Marcello's 
conversations with associates. On the tapes Marcello said, "Man, I know better 
than you. man, 'bout them politicians. , . . Edmund [referring to Edwin Ed- 
wards) and me all right, but I can't see him every day. . . . He's the strongest 
sonofabitchin' governor we ever had. He fuck with women and play dice, but 
won't drink. How do you like dat?" Edwards's lieutenant governor in 1979 was 
James Fitzmorris. Marcello was recorded as saying, "Fitzmorris? All he can do 
is ask a favor. He ain't worth a shit."" 

Dallas Morning News reporters Bill Lodge and Allen Pusey reported that 
at this same time Marcello was a borrower at Beebe-controlled Pontchartrain 
State Bank near New Orleans. James McKigney, Pontchartrain's president, j 
testified"* that Pontchartrain had lent money to Marcello. Marcello's son Jo- 
seph, and several corporations connected with Marcello. McKigney replaced 
Beebe as president of Beebe's Bossier Bank & Trust when Beebe resigned in 
1979.''* Marcello attorney Anthony J. Graffagnino-" was a director in 1983 of 
Sunbelt Life Insurance Co. , which had its headquarters in Beebe's Shreveport 
office (another Sunbelt director was Governor Edwards's commissioner of fi- 
nancial institutions, who supervised state-chartered banks and savings and 

Edwards' close associate Judge Edmund Reggie was a former Crowley city 
judge in the town where Edwards had once practiced law. Some observers felt 
Reggie may have been the real power behind Edwards, that it was Reggie who 
pulled the governor's strings. He was Edwards's personal attorney, served as 
his executive counsel while he was governor, and headed up Edwards's tran- 
sition team when he resumed the governorship in 1984. Reggie also was a 
close personal friend of Senator Ted Kennedy and had been Louisiana cam- 
paign manager of John Kennedy's 1960 campaign.-' 

Judge Reggie was a Louisiana power broker. And he was both a banker 
and a thrift owner. He owned the National Bank of Bossier City, in the same 
Shreveport suburb as Beebe's Bossier Bank & Trust.-- He started Acadia Savings 
and Loan in Crowley in 1957 and had been a director ever since. And he 
and Beebe owned stock together in several financial institutions. Reggie told 
us they had been friends for about 30 years, and they were associates in nursing 
homes, insurance companies, and real estate ventures. Investigators for the 
comptroller of the currency said several of Judge Reggie's real estate projects 
were financed by Beebe banks, and Reggie's banks made loans to Beebe-related 

Herman Beebe had positioned himself at the vortex of each of these separate 

The Godfather • 239 

but interlocking circles of influence — the Ben Barnes, Dixon/Barker, and Ed- 
wards/Reggie axes. By the end of 1981 Bcebe was a man to be reckoned with. 
Beebe was prepared to use everything he had learned over the years about banking 
and newly deregulated thrifts to build potentially the most powerful and corrupt 
banking network ever seen in the U.S. 


Beebe Gets Caged 

On January 8, 1982 — just two days before Dixon took control at Vernon Savings 
in Texas — Joe Cage was sworn in as a U.S. attorney and assigned to the Shreve- 
port office. Cage grew up in Monroe, about 100 miles due east of Shreveport 
in northern Louisiana, and throughout his high school career he was an out- 
standing athlete. When he was a sophomore — in spite of the fact that the school 
had no track team — he threw the javelin 203 feet, a U.S. record at the time. 
He served a tour of duty in the Marine Corps, returned to college, and at one 
time aspired to become an FBI agent. Instead he became a practicing attorney 
and spent the next ten years as a prosecutor in U.S. attorneys' offices and in 
private practice. In January 1982 President Ronald Reagan appointed him U.S. 
attorney, and he and his family moved to Shre\eport. 

Through the years Cage had worked on several cases of financial fraud and, 
unfortunately for Herman Beebe, he had developed a keen interest in white- 
collar crime. He liked to quote a line from an old Woody Guthrie song ("Pretty 
Boy Floyd") that went: 

As through this world I've rambled, I've seen lots of funny men. Some will 
rob you with a six-gun, some with a fountain pen. 

Joe Cage was to white-collar swindlers what Elliot Ness was to bootleggers. 
It was (and remains) rare to find a U.S. attorney familiar with the ways and 
methods of the professional white-collar criminal, their intricate paper trails and 
byzantine multimillion-dollar frauds. Untangling the deals is in itself an art, 
and explaining them to a jur>' of twelve honest men and women borders on the 
miraculous. But Cage found the cases both challenging and fascinating, and 
when he moved to Shreveport in 1982 he ran up against the Dr. Moriarity of 
his career — Herman K. Beebe. 


Beebe Gets Caged • 241 

When Cage arrived in Slueveport a white-collar fraud case was already in 
the early stages. It involved a smooth and wealth) i''reiieli businessman who 
lived in Texas, Albert Prevot, who was accused of defrauding the Small Business 
Administration by getting SBA loans and then diverting the money to his own 
uses. Assigned to work with Cage on the case was KB! Special Agent C Ellis 

Blount became Cage's indispensable right-hand man. He had a background 
in business law and shared Cage's interest in white-collar crime. They actually 
liked the challenge of wading through thousands of documents to piece together 
complex business transactions designed specifically to leave a cold trail. They 
developed a close working relationship, and eventually the two of them together 
would bring down the Beebe empire. 

Cage and Blount worked through the months on the Prevot case, and as 
they tightened the screws Prevot decided to try to make a deal. He offered to 
tell Cage what he knew about Shreveport businessman Herman Beebe, who 
was, he said, involved in all kinds of illegal activities. Cage said he was interested, 
and by September 1982 he had two plea agreements in the Prevot case and 
enough information about Beebe's affairs to justify empaneling a federal grand 
jury. What Cage had stumbled onto was Beebe's maze of business relationships 
with banks and corporations, hi November, Cage convened the grand jury and 
he and Blount went to work unraveling Beebe's tangled affairs for the jurors. 

"We'd have, say, 10 issues, trying to get them resolved with the grand jury, 
and in solving those 10, 15 more would come up," Cage told us later. It was 
like trying to nail jelly to the wall. Beebe's business deals were five dimensional. 
They went in every direction, and in every direction Cage said he saw transactions 
that worried him. He discovered that many banks and thrifts in Louisiana and 
surrounding states had participations and take-out agreements (interlocking fi- 
nancial arrangements) with Beebe's Bossier Bank & Trust, and Cage began to 
fear for the integrity — and safety — of the area's banking system. Cage and Blount 
alone handled all the grand jury documents, all the witnesses. They worked 
long hours, determined to get to the bottom of the complicated case. As Cage 
called witnesses to testify before the grand jury, word of the investigation trickled 
back to Beebe. Cradually, tension grew in the Beebe camp. 

At first Beebe just tried to shrug it off. 1983 should have been one of the 
best years of his life. He was flush with what seemed like an endless supply of 
money from numerous financial institutions, institutions whose owners or of- 
ficers were in place because Herman Beebe had put them there. He embarked 
upon an expansion program. In April he broke ground on a $12 million seven- 
story glass office building in his AMI complex that became known around town 
as the AMI Tower. Shreveport people called it an ivory tower because it was 
"out in the middle of nowhere." On the top floor were four palatial offices, one 
at each corner, where Beebe and his top echelon of officers directed a fast-paced 


operation that employed almost 6,000 people, over 1,000 of whom lived and 
worked in the Shreveport area. AMI had 17 subsidiaries and eonnections with 

14 other companies, with after-tax income of over $4 million and assets of $155 

In March 1984 a mutual friend arranged for Beebe"s now ex-wife, Mar>-, to 
visit the Reagans at their Santa Barbara ranch, near her own second home in 
Santa Barbara, and the public relations blitz was on. The Shreveport Times ran 
a full-page article in March 1984, most of it a fawning account of her visit 
written by Mary, along with pictures of her standing with President Ronald 
Reagan and Mrs. Reagan at their ranch. It made its point — Beebe had friends 
who had friends in verv' high places. 

Across town from the AMI Tower, in a plain comer office on the third floor 
of the Federal Building,' Cage and Blount were spending hundreds of hours 
combing through evidence and laying their trap. Cage became so convinced 
that Beebe was a danger to the banking and thrift community that he personally 
conducted the Beebe investigation. The grand jury was meeting once a week in 
Alexandria, over 100 miles south of Shreveport, so Cage was absent from his 
Shreveport office for days at a time. Under his personal direction the grand jun.' 
heard 1 50 witnesses and stayed in session for two years. Cage and Blount me- 
thodically formed a cordon around Beebe and AMI, and then they closed in 
step by step. On Halloween 1984, Beebe was indicted, along with three AMI 
officers and the CEO of Bossier Bank & Trust. They were charged with 21 
counts of fraud. 

Beebe was accused of having an AMI subsidiary illegally borrow $1 million 
from the Small Business Administration in a series of complex transactions that 
had taken place on New Year's Eve 1980. He was also accused of having Bossier 
Bank & Trust loan $1.85 million to Albert Prevot (the French businessman 
whose plea agreement spawned the empaneling of the Beebe grand jur>'), who 
then passed it through four corporations and on to AMI, thus allowing Beebe 
to avoid regulations against banks making loans to their owners. In response to 
a defense motion the judge separated the charges into Kvo trials — the SBA case 
and the Bossier Bank case. 

Beebe maintained an ominous silence in the wake of the indictments, but 
AMI, Inc., came out swinging, releasing a strong statement in defense of the 
five accused men. 

"They [the accusations) are the product of an investigation by a U.S. attorney 
and an FBI agent who for more than t\vo years have demonstrated the desire to 
obtain an indictment at any cost." The accuseds' high-powered defense team of 

1 5 attorneys included flamboyant attorney Richard "Racehorse" Haynes of Hous- 
ton and Camille Gravel, who was one of Louisiana's leading criminal defense 
lawyers, an advisor to Governor Edwin Edwards and Judge Reggie's best friend. 

The Beebe children, who had heretofore stayed out of the public eye, fell 

Beebe Gets Caged ■ 243 

in behind their father. Though the children were grown and Mary and Herman 
were divorced, the Beebes remained a close family. Beebe's son, Herman, Jr., 
and Beebe's two sons-in-law worked for him. Throughout the two-year grand 
jury investigation, they had all believed it would come to nothing. 

"I am a human being and 1 make a lot of mistakes," daughter Pam told 
reporters, "and my daddy does, too, but I know he would never set out to harm 
or deceive somebody or take anything that didn't belong to him." 

Daughter Easter Bunny's husband, David, was one of the accused (though 
charges against him were later dropped). 

"It was almost comical," said Bunny in her Louisiana drawl, "to think David 
could be indicted. Anybody who knows David would think, 'not sweet little 
David.' We are just thankful Camille [Gravel, defense attorney] was available. 
He is the kindest, most caring person. We must have looked to him like two 
little lost lambs." 

Many of the 1,000-plus AMI employees in Shreveport took personal offense 
at the attack on their employer. They held prayer meetings in the AMI Tower 
and turned out at important times to show support for their boss. The grumbling 
against Cage had begun. 

"The ones [AMI employees] I've talked to," said an employee, "wondered 
what Mr. Cage has against our boss. It seems so personal, like a vendetta. We 
wondered why the government is spending so much money to go after one man. " 

When the first trial began in January 1985, Beebe's family and friends, 
including ex-wife Mary, faithfully took their places on wooden benches in the 
courtroom at the Federal Building in Shreveport. During breaks they huddled 
in small groups, speaking in quiet tones, exchanging subdued smiles, obviously 
under tremendous strain. Outside the courtroom the whole town of Shreveport 
waited to see what would happen to one of Shreveport's best-known citizens. 

Within a few days the prosecution and the defense rested their cases and 
the judge sent the jury out to deliberate. On January 17, 1985, the jurors came 
back in with a verdict. All eyes in the standing-room-only courtroom were on 
Judge Tom Stagg when at 1:10 p.m. he read the jury's decision: Guilty. The 
jury had found Beebe guilty of the overall charge of defrauding the SBA. They 
did not find him guilty, however, of several specific charges of lying or benefiting 
from the loans. Beebe was sentenced to 200 hours community service and ordered 
to pay a $21,000 fine and $1 million in restitution. 

With hardly time to catch their breaths, the attorneys, defendants, family, 
friends, and reporters gathered on February 4 in a courtroom in Lafayette, 
Louisiana, 200 miles south of Shreveport. There the second half of the trial, 
dealing with the Bossier Bank charges, was to be held. Cage charged that Beebe 
had defrauded his Bossier Bank & Trust by having the bank make a loan to 
Albert Prevot that was secretly routed to AMI. Cage said the purpose of the 
transaction, which took place on New Year's Eve 1980, was to improve the looks 

244 • INSIDE )OB 

of ami's balance sheet at the end of the year. Then Becbe returned the money, 
\ia Prevot, to Bossier Bank. Beebe was again represented b\ Caniille Gravel, a 
distinguished white-haired Southern gentleman who sounded like a Baptist 
preacher in the courtroom. 

"Herman Beebe is a builder," thundered Gravel, "the kind of man that has 
helped to build this country. He has risen from the red clay hills of north 
Louisiana to the position he now occupies as a leader of the business commu- 
nity. . . . Any conviction of any of the defendants in this case carries with it a 
life sentence. Mr. Beebe's career as a prominent and successful businessman 
would be over. The blight of a conviction would stain him for the rest of his 

Gravel told the jury that whatever loans Mr. Beebe received were in the 
course of legitimate business. The loans had all been repaid. Besides, what was 
illegal about trying to make your financial statement look better at the end of 
the year? Where was the harm? 

Cage was unmoved. "It wasn't a legitimate loan, merely a true and classic 
sham loan to a person who agreed to do a favor." 

But this time Cage did not prevail. It took the jury 50 minutes to acquit 
Beebe of all charges. They just could not believe Beebe had intended to defraud 
his own bank. When Judge Tom Stagg read the verdict the courtroom erupted 
in shouts of joy. Beebe seemed stunned and declined comment, but Mary Beebe 
said emotionally, "I'm so grateful. I don't know what to say. I really am so 
thankful. So grateful to God, so grateful to the lawyers and the judge and so 
grateful to the jury. " Someone in the background yelled about a phone call to 
the governor. Smiling supporters hugged each other and pumped e\ery friendly 
hand. A disappointed Joe Cage led his team from the courtroom without a word. 
The score stood even at one-to-one. Cage went back to his office, and he and 
Blount started all over again, spreading out the deals, looking at the connections, 
following the money. Three months later, on June 4, Cage convened a second 
grand jury to investigate Herman Beebe. 

Cage's onslaught took its toll on Beebe. He began to have difficulty finding 
jjeople willing to do business with him. He was a convicted felon — convicted 
of loan fraud. He found it increasingly difficult to borrow money. His name, 
and the names of his companies, became like red flags when a bank examiner 
found them on a list of loans. Many of the officials of the 200 to 300 banks and 
savings and loans that he typically did business with were called to tcstifv' before 
the grand jury, and many of them decided Beebe was just too hot to handle. 
They stopped associating with him. 

Beebe, a man who had lived a very private life in recent years, suddenly 
found himself and his business affairs laid open to public view, "My company 
was leveraged, like so many companies are," he explained to Shreveport Times 
reporter Linda Farrar. "And the turn the investigation took just cut my credit 

Beebe Gets Caged ■ 245 

off totally. I had no choice but to start liquidating. I just had so much bad 
publicity ... it had just prctt\' well done away with my opportunity to make a 
living. ... It just went downhill in a hell of a hurry." 

Loss of insurance business was especially difficult for Beebe to sustain because 
it had been an important source for the cash flow his other businesses required. 
He began what appeared to be a liquidation of the Beebe empire. Eventually 
financial institutions, even those with ties to Beebe, were forced to foreclose on 
most of his holdings (including the AMI Tower), and he sold whatever was not 
mortgaged to the hilt. But federal investigators said he had put many of his assets 
into his children's names, and they believed he continued to control still more 
investments through third parties. 

Cage and Blount proceeded to prepare the new case against Beebe. Their 
investigation drew the attention of other federal agencies. Two conferences were 
held, in Baton Rouge, Louisiana, and Memphis, Tennessee, between federal 
prosecutors and state and federal regulators, and between April and June 1985 
the comptroller of the currency prepared the series of secret reports on Beebe's 
banking activities that first clued us in to the scope of Beebe's influence. After 
we obtained a copy of the reports, federal officials told us that while the docu- 
ments might contain minor errors, they stood behind them as a fair and accurate 
assessment of Beebe's influence in banking and savings and loan circles in 1985. 
Compiled independently of Cage's investigation, the reports revealed 12 national 
banks that could "in some way be controlled or influenced by Beebe." Key Beebe 
figures at those banks included Edmund Reggie and Don Dixon, the reports 
said. Listed, too, was Harvey McLean, who owned Palmer National Bank in 
Washington, D.C., and who had a multimillion-dollar line of credit at Bossier 
Bank & Trust. McLean was also a director of Paris Savings and Loan, which 
Dixon associates had said was Dixon's "junk S&L." 

The comptroller of the currency report then listed 1 3 national banks that 
Beebe might "exert some influence over." Listed as being the link between Beebe 
and some of these banks were Ed McBirney (owner of Sunbelt Savings), Jarrett 
Woods (owner of Western Savings),- Carroll Kelly (part of the network exposed 
by the failure of Citizens State Bank in 1976 and now an owner of Continental 
Savings in Houston), and Tyrell Barker. 

The OCC study listed 55 state banks (in Arkansas, Florida, Louisiana, Mis- 
sissippi, and Texas) and 29 savings and loans (in Colorado, California, Louisiana, 
Mississippi, Ohio, Oklahoma, and Texas) "controlled by Beebe and his asso- 
ciates. ..." Among the S&Ls listed were Key, Continental, Mercury, Paris, 
State/Lubbock, Sunbelt, Vernon, and Western. Among the people mentioned 
as a Beebe-bank associate was Rex Cauble, described in the report as "a convicted 
dmg dealer [who] has had massive debt at Bossier Bank & Trust." Cauble owed 
two other Beebe-related banks $1.5 million and owned stock in two others. (See 
Appendix A for full, unedited OCC report.) 


One hundred and nine banks and thrifts had been pinpointed by the comp- 
troller of the currency's investigators as having a tight enough relationship with 
Beebe to be worthy of serious concern. The report so worried the comptroller 
that it was brought to the attention of Attorney General Ed Meese, the FSLIC, 
and the P'DIC at a joint meeting of tlie Justice Department's new Bank Fraud 
Working Group. They realized that with Beebe's extended network of influence, 
he could shift fraudulent deals not only from institution to institution but from 
regulatory system to regulatory system — which would make him almost impos- 
sible to stop. A loan he wanted to hide could be structured through federally 
regulated or state-regulated thrifts, banks, and insurance companies all over the 

The information in the OCC report would not have startled U.S. Attorney 
Joe Cage and FBI Special Agent Ellis Blount had they known of it, but it was 
not shared with them. On their own they forged steadily ahead, presenting 
documents, evidence, and witnesses to the second Beebe grand jury. 

Joe Cage's hot breath got to be too much for Beebe and suddenly in late 

1985 he packed up and moved from Shreveport to Dallas to start a new life. 
"I left town," Beebe said later, "because the atmosphere was such that I just 

felt like it would be very difficult to — " He interrupted himself and then con- 
tinued, "It's not difficult for me to make a living. I could make a living on the 
Sahara Desert. But I had to get to an atmosphere that was at least better than 
where I was." 

Beebe started life in Dallas on a high note by marrying his girlfriend from 
Shreveport. Ostensibly, they were building a new life together from scratch, and 

1986 was a hard year to get started. S&Ls were dropping like flies — that summer 
Dixon resigned from Vernon, McBirney resigned from Sunbelt, and Barker was 
indicted — and the atmosphere in North Dallas, where Beebe had an office, was 
one of deepening gloom. The runaway real estate development craze had resulted 
in such a glut that shopping centers and condos stood vacant all over town. 
Dallas had about 38 million square feet of unused office space (equivalent to 
17 Empire State Buildings). Dallas reporter Byron Harris said of 1986, "The 
silence of deals not being made was deafening." Still Beebe somehow always 
seemed to have money. With his empire in shambles, where was he getting it? 

"If you're interested in Beebe, you should be interested in Southmark," a 
source told us one day. "Have you seen the transcripts of Southmark's casino 
licensing hearings in Las Vegas? I think you'd find them interesting." 

We had found this Dallas-based company in some of our other thrift in- 
vestigations. Now we were to learn that Southmark had made nearly $30 million 
in loans to Beebe (and Beebe related companies) after his conviction. Altogether, 
Southmark conducted nearly $90 million in business deals with Beebe. Some 

Beebe Gets Caged • 247 

of tlie business was paid for in Southmark stock. 'I'lie company's 1985 10-K 
showed that Herman Beebe held nearly 62 percent of Southmark's Series E 
Preferred stock. (FSLIC later charged that Beebe used some of that stock to pay 
off a loan he had at Edmund Reggie's Acadia Savings and Loan.) 

Southmark was a "Forbes 500" company based in Dallas and run by Gene 
Phillips, a calculating, tough negotiator, described by competitors as one of the 
most astute real estate men in the country. He was of medium height and build, 
sandy-colored hair, not particularly imposing. But he took a hard-nosed, struc- 
tured approach to deals that awed people on the other side of the negohating 
table. Phillips was a chemical engineer who had been bitten by the real estate 
bug. BusinessWeek reported that in 1973, when Phillips was 35, he had dealt 
his way right into bankruptcy in South Carolina. To pay off his debts he went 
to work for one of his larger creditors and later bought the company. In 1978 
he tried to buy a bank in Georgia, but the comptroller of the currency blocked 
the purchase because Phillips, he said, had not told the truth on his application. 
But, true to form. Phillips still made $2 million on a $4 million investment 
when he sold the bank shares he had bought before his application was denied. 

Then in 1979 he and his partner. New York city attorney William Friedman, 
began to buy up the stock of a defunct Dallas real estate investment trust. By 
1981 they had acquired control, and five years and about 35 acquisitions later, 
they had built Southmark into a publicly traded financial services company with 
27,000 employees (including subsidiaries) and nearly $10 billion in assets. South- 
mark's extraordinary increase in assets attracted a lot of attention, and Phillips's 
eagerness to take unorthodox risks raised eyebrows. Forbes magazine said he and 
Friedman ran Southmark more like their own private investment company than 
a big public corporation. For example, when one of Phillips's own companies 
was called upon to repay a construction loan, Phillips sold the company to 
Southmark and let Southmark repay the loan. The deal cost Southmark $9.5 
million. Pressed to explain Southmark's willingness to take on the debt, a South- 
mark officer told reporters the venture "looked like an attractive project." 

After thrifts were deregulated, Phillips hurriedly searched for one to finance 
his acquisitions. In 1983 Southmark acquired San Jacinto Savings, and for three 
years the S&L was under Phillips's control. But in 1986 worried regulators 
ordered the S&L to stop funding Southmark's purchases, and Phillips had to 
rely on another favored way to raise cash. That year he raised $950 million 
through Drexel Burnham Lambert. In fact, much of Southmark's explosion in 
assets, according to SEC filings, was financed by junk bonds marketed for Phillips 
by his close friend Michael Milken, Drexel Burnham Lambert's junk bond king. 
{Forbes reported Drexel Burnham made well over $50 million in fees by financing 
Southmark and its subsidiaries.) When Phillips borrowed money,' he took more 
than he needed and used the extra to invest in other companies' junk bonds 
being marketed by Milken — a common practice of many of Drexel Burnham's 


favorite customers. (Tlie practice bore a disturbing resemblance to the cash-for- 
trash deals, where a thrift borrower was required to take more money than he 
wanted and to use the excess to buy a piece of junk property from the thrift. 
One year, The Wall Street Journal reported, Drexel raised $450 million for 
Southmark, and Phillips used all of it to buy other junk bonds Drexel was 
promoting.)^ Southmark became the largest real estate-based conglomerate fi- 
nanced by Milken.^ It may also have been one of the most complex. Even 
seasoned Wall Street analysts admitted to reporters they couldn't figure out the 
company's maze and layers of debt. What they did know, however, was that 
Southmark had a lot of debt coming due all at once in the early 1990s. 

That outstanding debt didn't seem to phase Phillips. Records showed that 
Southmark paid him over $1 million in 1988. He and his wife owned a $1 
million condominium on Wilshire Boulevard in Los Angeles and a $10 million 
estate in Dallas (previously owned by Lamar Hunt and, then, James Ling). He 
traveled in a $3.5 million DC-9 that used to belong to singer Kenny Rogers. 

Perhaps it was his hunger for cash that sent Southmark to the gaming tables, 
a move that unwittingly exposed the company's close ties to Herman Beebe. 
Whatever the reason, the afternoon of November 5, 1986, found Phillips, Fried- 
man, and their attorney sitting at attention before the Nevada Gaming Control 
Board. The commission's job was to make sure no one with criminal associations 
or backgrounds got a casino license. Southmark owned the land where the Silver 
City Casino in Las Vegas was located and had worked out an agreement with 
the owners of the casino that Southmark could collect a percentage of the casino's 
gambling revenues if the gaming control board approved. 

But from the opening of the session it became clear that what the gaming 
control board wanted to talk about was Herman Beebe. As soon as the board 
had dispensed with preliminaries, one member got to the point: 

"Mr. Phillips, could you please describe first of all how the relationship, 
business relationship or otherwise, with Mr. Beebe came about occurring? Sec- 
ondly, how it's evolved and, if you would, what the current relationship with 
Mr. Beebe is?" 

Phillips said that in 1984, shortly before Beebe was indicted, he and Beebe 
had reached an agreement for Southmark to purchase Beebe's nursing homes 
for almost $100 million. Beebe owned 62 nursing homes in five states with over 
6,500 beds. 

Then, Phillips said, before they could close the deal Beebe "ran into severe 
financial difficulties" (a euphemism for Beebe's indictment and the resulting 
fallout) and Southmark, Phillips contended, had to loan him money to keep 
him afloat. Otherwise, Phillips said, Beebe might have gone into receivership 
and the contract between Phillips and Beebe would ha\e been voided. Phillips 
assured the gaming control board that Southmark would have had nothing to 

Beebe Gets Caged • 249 

do with Beebe after his indictment had it not been for PhilHps's desire to con- 
summate the purchase of the nursing homes. 

"Obviously, " said Phillips, "Mr. Beebe would not be the appropriate or 
suitable type of individual to have an ongoing relationship with." 

But, the commission member persisted, ". . . you loaned Mr. Beebe an 
additional $29.6 million in a total of five other loans and made three other 
purchases from Mr. Beebe, all after the date of his conviction." He enumerated 
the transactions: February, $500,000 loan; April, $14.2 million nursing-home 
purchase; May, $1 million purchase and $2.'? million loan; June, $1 million 
loan; August, $25.5 million loan; and December ("almost a year after his con- 
viction on fraud and wire fraud and other charges"), a $7 million purchase of 
Beebe's Savings Life hisurance Company. 

"Now, that adds up to $29.6 million'' in loans after the man was convicted," 
the commission member concluded. Then he got to the crux of the commission's 
concern. "Mr. Beebe . . . had a $700,000' restitution levied [as a result of his 
1985 conviction]. Would you know whether Mr. Beebe paid his fine with 
proceeds of loans from your companies?" and again: "It appears that (Southmark's 
loans to Beebe] were for the benefit of Mr. Beebe, to keep his head above water, 
in a business sense, so that he could continue operating even after he had been 
convicted of federal charges." 

Phillips and Friedman stood their ground.' They readily admitted that for 
a time they were propping Beebe up. They said they even tried to get control 
of Bossier Bank & Trust. But all of those transactions were part of the original 
nursing-home purchase agreement, made before Beebe was indicted, or were 
attempts to keep him in business until they could conclude the deal. And all 
the loans they made to Beebe, they said, had been repaid with the exception of 
$1 million. 

Phillips's explanations evidently satisfied the gaming control board, and after 
a lengthy discussion of other topics, such as Phillips's 197? bankruptcy, the board 
approved Southmark's request. And there our interest in Southmark might have 
ended, except for the fact that the company had shown up in some of our earlier 
investigations. We went back to our files and began compiling a list of South- 
mark's appearances. Time and time again the company had turned up at the 
end of our investigation of a failed thrift. Southmark would appear, most often, 
in the role of scavenger, acquiring the troubled assets of those who had con- 
tributed to the failure of the institution. We had found, for example, Southmark 
or a Southmark subsidiary acquiring assets formerly owned by Mario Renda, 
Robert Ferrante, Morris Shenker, John B Anderson, and Tom Nevis. Now many 
of these deals were further confirmed by Phillips's testimony before the gaming 
control board: 

Southmark's Pratt Hotel division acquired the Palace Hotel and Casino 

250 ■ INSIDE |OB 

project in Puerto Rico, which investigators told us was being develojjed by Mario 
Renda and Robert Ferrante until their empires crumbled; Southniark bought 
the Double Diamond A. Ranch near Reno that had belonged to Tom Nevis;'' 
Southmark bought some of Morris Shenker's stock in the Dunes Hotel and 
Casino when Shenker and John Anderson fell on hard times and tried to buy 
control of the casino but lost out to a Japanese group; Southmark tried to buy 
Eureka Federal Savings" liens against Anderson secured by his Maxim Hotel 
and Casino; Southmark tried to fund the purchase of the Aladdin Hotel and 
Casino by Harr>' Wood, a Shreveport native who ran the Dunes's junket op- 
erations;'" Southiuark's S&'L subsidiary, San Jacinto Savings, got media attention 
when it tried to buy troubled Continental Savings in Houston (Beebe had bank- 
rolled Carroll Kelly and David Wylie in their purchase of Continental)." And, 
finally, we discovered on a 1988 trip to Shreveport that Southmark now owned 
the AMI Tower. 

Then there were the "coincidences. " For example, Southmark's 1 0-K showed 
Southmark owned 37 percent of Pratt Hotel Corporation,'- and in 1986 Pratt 
was trying to buy Resorts International (which had opened Atlantic City's first 
casino and which was building the $S25 million Taj Malial casino hotel there). 
Funny, we thought. We'd just learned from Cage that Judge Edmund Reggie 
had been a $10,000-a-month consultant for Resorts International for about a 
year. When we checked with Reggie, he said the two events were unrelated. 

Then we found Southmark's fingerprints at Silverado Savings and Loan in 
Denver." Neil Bush, son of then Vice President George Bush, became director 
on Silverado's board in 1985 but resigned just days after his father was nominated 
in 1988 as the Republican candidate for president and just three months before 
Silverado was forced by regulators to establish nearly $200 million in loan loss 
reserves to cushion the thrift from expected losses on shaky deals. Neil Bush 
said he resigned for personal reasons. Others said his resignation was to spare 
his father the embarrassment of Silverado Savings' condition. (Silverado collapsed 
in late 1988.) After all, one of George Bush's jobs as vice president during Ronald 
Reagan's first term had been to chair the Bush Task Group on Regulation of 
Financial Services. (The group was part of Ronald Reagan's deregulation ap- 
paratus. It died a quiet death in August 1983 after accomplishing very little. )'■* 

After we had collected all of this information about Southmark, we asked 
ourselves what it meant, that Southmark, a giant corporation, had turned up in 
investigations that we had thought at the outset were entirely unrelated. A 
disturbingly large number of our trails led to Southmark in one way or another. 
The company appeared to be a major player in the network of people wc had 
been tracking — often there to pick up the pieces whenever one of our thrift 
pirates hit rough water. Apparently someone else was wondering as well. When 
the Dallas Times Herald printed the list of the 400 individuals whose records 
were subpoenaed by the Justice Department's fraud task force in 1987, Gene 


Beebe Gets Caged ■251 

Phillips was among them. Southmark itself began to show up on the business 
pages of daily newspapers, as Phillips and F'riedman were inereasingly forced to 
deny that Southmark was in deep trouble. Its Houston thrift, San Jacinto, was 
put under a supervisory order in 1988 and forced to take almost $140 million 
in write-downs. Regulators forced Southmark to remove two of its three directors 
from San Jacinto's board, and in early 1989, under pressure from Southmark 
investors and directors, Phillips and Friedman resigned from their positions at 

The Southmark puzzle was one of those black holes into which a reporter 
could disappear and never be heard from again. One normally reliable source 
even told us he had phone records showing that a real estate broker who had 
close dealings with both Southmark and Carlos Marcello had also made phone 
calls to Major General John Singlaub, of Contra-gate fame. We were intrigued, 
but we had a deadline to meet and we had to leave the further unraveling of 
Southmark for later. But we had discovered a powerful player in the thrift game 
and we had learned who it was that had kept Beebe afloat after Cage convicted 
him. Thanks to associates like Southmark, Beebe was not ever likely to be down 
and out. 


Round Three 



After Herman Beebe's 1985 conviction he was assigned five years probation and 
ordered to perform 200 hours of community service in Dallas. In early 1987 he 
was performing that community service at the Dallas Life Foundation, a shelter 
for the homeless. He was also selling employee benefit packages out of his office 
in a new North Dallas complex near the Addison Municipal Airport, and he 
claimed he was making $5,000-a-month payments toward the $1 million res- 
titution the court had ordered. He divided his week between Dallas and his 
California retreat at La Costa, hardly the life-style of a so-called ruined man. 

Joe Cage's long arm soon served Beebe with a subpoena, and in February 
1987 Beebe was grilled for six hours in front of the Louisiana grand jun- that 
was still investigating his affairs. Shortly thereafter he agreed to an interview 
with Shreveport reporter Linda Farrar, who had covered his 1984 indictment 
and trial. She traveled to Dallas for the inter\iew. 

This second grand jury, he said, was also going to indict him. "I asked them 
[the jury], 'Just what do you want from me? I need to pay the people I owe . . . 
just what are you seeking? I'm not a liar. If I did something, if you'll ask me, 
I'll tell you.' " 

He said to Farrar, "If you give me the money that's been spent on [inves- 
tigating] me, I can put you, your mother. President Reagan, and everv'body else 
in jail." 

With a rueful smile he denied again the old allegations of Mafia ties and 
casino skimming: "... try to find where I've ever been in the Mafia, where I've 
been in drugs, where We done anything unethical in business. If I really had, 
after ten years, somebody would find something really highly criminal. 

"Given a little time to be left alone, I can pay off my debt because I'm smart 
enough to do that. ... 1 need the government to leave me alone so I can put 
my life back together. I'm a good businessman, I work hard, and I'm smart 


Round Three • 253 

enough. If they'll leave me alone, I'll he right back on top after two or three 

That was exactly what worried Joe Cage, exactly what drove him in his 
dogged pursuit. The second Beebe grand jury had been in session almost two 
years, meeting week after week, examining mountains of tedious evidence. And 
then Cage got a real break. Late one winter evening, a Friday night after work. 
Cage was sitting on the floor in his office studying documents and he came 
upon a smoking gun that would become known as the Bussell notes. Beebe had 
been claiming that he was just another victim of the scam Cage was investigating, 
but these notes, written by his associate David Bussell,' appeared to prove oth- 
erwise. The notes consisted of a list of figures with dates and notations like "we 
owe half of this because we own one-half of the farm," and Cage believed they 
proved Beebe had been a full partner in the deal. '"I'hey were handwritten notes 
of a defendant, an admission of what we were trying to prove," Cage told us 
later. He could hardly believe his eyes. 

In the spring of 1987 Cage's grand jury indicted Beebe and charged him 
with fraud involving $30 million in loans from over 16 financial institutions 
spread from Colorado to New Orleans.- The loans had been made in 1983 and 
1984 — during the very time the grand jury had been investigating Beebe the 
first time — to Richard Wolfe, who was also indicted. (Charges against Wolfe 
were later dismissed.) The indictment charged that Beebe arranged for Wolfe to 
get loans from institutions where Beebe had "influence " (including Continental, 
Ponchartrain, Vernon, Key, and State/Lubbock savings and loans) without the 
loan papers reflecting that Beebe got a lot of the money. And this time Cage 
didn't mince words. The charge, he said, was bank robbery. 

Beebe later explained that Ben Barnes had introduced him to Richard Wolfe 
10 or 12 years earlier, and a few years later he had run into Wolfe again at 
Vernon Savings. They decided to do some business together.' Richard Wolfe 
and his Dallas attorney, David Wise, were hip-deep in Beebe's bank network. 
Wise himself chartered at least five banks that the comptroller's report identified 
as Beebe banks. 

One of the companies named in the 1987 indictment against Beebe and 
Wolfe was League, Inc. We thought there was something familiar about that 
name. We checked with Cage and, sure enough, at one time a Southern Cal- 
ifornia developer, G. Wayne Reeder, had discussed becoming a partner in 
League, Inc. We looked in our files and found a League, Inc., document with 
Reeder's signature on it, right next to Beebe's. In fact, said Beebe's former right- 
hand man Dale Anderson, Beebe and Reeder had tried to do several deals 
together. "Herman must have run into Reeder while staying down at La Costa," 
Anderson said. (Both men had homes at La Costa.) We had run into Reeder 
often ourselves, beginning months earlier during our investigation of San Marino 
Savings in San Marino, California. (San Marino, one of the first thrifts where 


we ran into Mario Renda, failed in late 1984.) Reeder was a multimillionaire 
said to have holdings in 16 states, and the Justice Department confirmed that 
by mid-1989 he was under FBI investigation in Tennessee, Rhode Island, Ar- 
izona, Texas, California, and Florida in connection with a number of his busi- 
ness deals in those states (no charges had been filed as of this writing). Once 
again a trail we had been following had unexpectedly wound up at Beebe's door.* 

The walls were closing in on Beebe and his small legion of surrogates. The 
FSLIC filed a civil suit in June (Beebe was mentioned but not sued) and claimed 
that in 1982 and 1983 State/Lubbock had loaned $4.5 million to Fred Bayles 
and others who were straw men for Beebe. Beebe, they said, had actually gotten 
the money. The comptroller of the currency report listed Fred Bayles as a key 
member of Beebe's banking consortium. He had bought stock in several banks 
with Beebe's help, including stock in a bank where Judge Reggie was a director. 
When Beebe needed it Bayles would have his own institution place deposits at 
Beebe-controlled banks at a very low interest rate. And then when Bayles got 
into financial trouble, records showed, AMI absorbed his banks. When asked 
about his business Bayles replied, "What we are is, we're in the borrowing 
business. " In 1985 Bayles pleaded guilty to bank fraud in Mississippi, and in 
1988 he was convicted of bank fraud in New Jersey. 

"That old boy," said one acquaintance about Bayles, "could sell the 
Brooklyn Bridge. He was going to court to get sentenced to five years (for 
the Mississippi bank fraud), and he spent 20 minutes with the judge and 
the judge gave him five years probation." He got one year for the New Jersey 

Bayles interested us because we had run across him earlier at North Mis- 
sissippi Savings and Loan in Oxford, Mississippi, where he was a big borrower. 
Some law-enforcement officials wondered out loud to us if he had fronted for 
Beebe there too. The man who owned the S&L, a Dr. Joseph Villard, claimed 
he had been Beebe's physician when Beebe lived in Alexandria, Louisiana, 
before he moved to Shreveport. When we talked to Villard he mentioned that 
San Antonio loan broker John Lapaglia was his friend. In fact, he said, "John 
might be a second or third cousin to me, just by accident.'"" (In January 1984 
North Mississippi's president and owner were indicted for several counts of wire 
and bank fraud. They pleaded guilty to some of the counts.) 

We had originally taken a look at North Mississippi not because Beebe had 
ties there (in fact, when we first looked at North Mississippi, we had never heard 
of Herman Beebe) but because Mario Renda's F'irst United Fund was involved 
in "special deals" there. Now we learned that both Renda and Beebe, or their 
associates, were working deals out of North Mississippi Savings. Apparently when 

Round Three • 255 

word traveled the thrift grapevine that an S&L was willing to deal, both Rcnda 
and Becbc quickly got the news. 

An FBI agent investigating thrift failures in the Sunbelt area said it reminded 
him of the Depression days when hobos would paint a large "X" on the sides 
of a barn to tip other hobos that the ham was a friendly spot to curl up for the 
night. Hundreds of S&Ls must have had big X's scrawled on their backsides. 

Beebe continued to try to do business out of his office in North Dallas, but 
the grand jury indictment in the spring of 1987 and the FSLIC lawsuit filed 
soon thereafter made it more and more difficult for him to maneuver. And 
behind it all, in Beebe's mind, was Joe Cage. Cage was ruining him. He was 
dragging him down. Cage was like a mad dog who wouldn't let go of Beebe's 
leg. Something had to be done. Beebe decided to hire Gerry Spence. 

Spencc was a famous millionaire cowboy attorney from Jackson Hole, Wy- 
oming. He had gotten national recognition in 1979 by winning a $10.5 million 
settlement against the Kerr-McGee Corporation in the Karen Silkwood pluto- 
nium-contamination suit. In 1981 he got a huge judgment against Penthouse 
magazine for allegedly libeling Miss Wyoming in a cartoon. He was credited 
with having mastered a courtroom style that went from the easy manner of a 
front-porch philosopher to what Esquire magazine described as the "fevered pitch 
of the country preacher in the grip of divine inspiration." Spence said he viewed 
the courtroom as a place of "blood and death," and in 30 years as a lawyer, he 
claimed to have seldom lost a case. Beebe decided to hire Spence to represent 
him in his third round with Cage. 

Spence agreed to take Cage on and came out swinging. He filed an 80-page 
motion with the Louisiana court in the summer of 1987 requesting that Cage be 
disqualified from prosecuting Beebe's case. In his motion he charged Cage with 
"prejudicial and vindictive misconduct." He accused Cage of having conducted a 
personal vendetta against Beebe. He said the whole witch-hunt was politically 
motivated, that Cage was trying to make a name for himself at Beebe's expense, 
that Cage showed no sense of justice, fair play, or decency. He told the judge that 
Cage had harassed Beebe's business associates and had offered Beebe freedom if 
Beebe would "give [to Cage] the governor and Judge Reggie." Judge Stagg, who 
had presided over the first two Beebe trials, agreed to hear the motion and for six 
and a half days Spence raked Cage over the coals before the judge. 

Spence was in rare form. A massive man, six feet two and more than 200 
pounds, he wore a brown suit and cowboy boots and carried a Stetson into the 
courtroom on the opening day of the hearing. He had long gray hair that was 
swept back on the sides in ducktails and hung down over his collar. He stalked 
the courtroom, hands in his pockets, at times leaning back on his heels, clutching 


his glasses in his teeth, his demeanor rich with histrionics. Sp)ence called Cage 
to the witness stand and kept him there over two days. 

'isn't it true that one of the overriding compulsions of your life has been 
the prosecution of Mr. Beebe?" Spence demanded. 

"No, sir," Cage replied. 

"Would you grant me that it has been the most important case of your 
career?" Spence asked. 

"Yes, sir, that's true," Cage answered. 

"In all the Beebe cases, wouldn't you take all the witnesses that Beebe could 
use to defend himself and threaten them with prosecution?" 

"No, that hasn't been my tactic." 

Cage kept his cool. Sometimes he appeared amused, sometimes irritated. 
But he was polite to the bitter end, answering questions with "Yes, sir," and 
"No, sir" while steadfastly maintaining that his investigation and prosecution of 
Beebe had been completely fair. 

Spence, on the other hand, couldn't seem to think of an analogy too venal 
for Cage. He accused him of criminal acts, of conspiring with another attorney 
to set Beebe up. In one two-hour diatribe Spence began by referring to the 
"blessed liberty" of constitutional rights and the dangers in abuse of prosecutorial 

"A prosecutor has the power to destroy human beings," he said. "Like mold 
on an otherwise scrumptious pie, it has to be removed." 

He referred to Cage's behavior as "repulsive" and "patently silly." Cage's 
occasional "I don't remember" he characterized as "a lie that can't be proven." 

He equated Cage and a former Beebe defense attorney who was a friend of 
Cage's as "twin black holes in space. These people should be called the Euripides 
twins." As with black holes, "information was sucked in and nobody heard or 
saw anything after." They were, he said, a "double-headed monster." Beebe, 
he said, "was hog-dressed. The last hair was scraped off his naked hide" by Cage 
and his team. 

Spence's attack sounded so vile that shocked courtroom spectators turned to 
whisper to each other. Several times Judge Tom Stagg admonished Spence, 
sometimes calling him to the podium for consultation. At one point during a 
particularly thunderous oration by Spence, Stagg pointedly commented that 
poor hearing wasn't one of his problems. 

Spence's charges were more than empty rhetoric or courtroom drama. If the 
judge had ruled in his favor, there could have been serious career repercussions 
for Cage. When Spence finally ran out of steam. Cage was livid and began work 
on a written response to Spence's allegations, which he filed with the court. 

"The charge that my professional life has focused on the goal of toppling 
the Beebe empire is completely ridiculous. I am accused of questioning almost 

Round Three • 257 

every person who has ever conducted business or been associated with Mr. Beebe. 
Then I'm accused of failure to seek out material evidence favorable to Mr. Beebe 
that was readily available to me. If the questioning of almost every person Mr. 
Beebe has dealt with would not reveal anything favorable to Mr. Beebe, what 
would? . . . If the investigation and resulting 19-count indictment is considered 
'Bcebe-hunting,' then so be it." 

After taking under consideration Spence's motion to remove Cage from the 
case. Judge Stagg ruled that Cage's investigations had been fairly done and the 
case could proceed. 

"We have excellent lawyers here," he said. "Both sides are intractable in 
their belief they are right." 

The adversaries met again in the courtroom in the fall of 1987 — Spence for 
the defense, Cage for the prosecution. The trial was again being held in Lafayette, 
200 miles south of Shreveport, so Cage and his team were .staying in a motel 
near the Lafayette courthouse. This time Cage knew he had Beebe nailed. Along 
with all the other documentation and evidence he had amassed, he had the 
Bussell notes, which were an admission of guilt in the handwriting of one of 
Beebe's close associates. 

The trial proceeded as Cage had expected until the day before the case was 
to go to the jury. In a surprise move Judge Stagg decided in favor of a defense 
motion that Cage not be allowed to refer to the Bussell notes in his closing 
arguments. Cage was devastated. The Bussell notes were the key to his case. He 
had intended to hammer them home to the jury the next day iii his closing 
arguments. In a moment of frustration he told a Texas reporter that "the judge 
has sabotaged my case." 

The next morning Cage did not show up in the courtroom. His assistant 
appeared to handle the case. Word spread quickly that Cage had disappeared. 
Rumors ran wild. Where was he? What had happened? After all these years, 
the thousands of hours, where was he? 

The jury deliberated two days and on the third day sent word that they were 
unable to reach a verdict. Judge Stagg declared a mistrial. Cage, who had been 
monitoring the progress of the trial from the motel, saw years of work slip away 
into nothingness. He couldn't understand why Judge Stagg had made the ruling 
about the Bussell notes. But he knew why he had refused to go back into the 
courtroom. It was a matter of principle with him. Even though he knew Judge 
Stagg would hold him in contempt of court and could even put him in jail, 
even though he knew he could very well be fired, the Beebe case was too 
important not to register his protest in the strongest po.ssible manner. He and 
Blount believed they knew the extent to which Beebe's scams threatened the 
financial fabric of Louisiana and surrounding states. They also believed they 
knew how deep within the political power structure Beebe's influence ran. They 


had successfully prosecuted Becbc once, and they wanted a second felony con- 
viction to make sure he wouldn't be able to worm his way back into action. 
They had put everything they had into a thorough prosecution of the case. 

A sober prosecution team headed back to Shrc\ eport. Judge Stagg found Cage 
in contempt of court and a panel of judges reprimanded Cage for abandoning the 
Beebe case to his assistant. But they could have done much worse, and Cage be- 
lieved their comparatively gentle treatment of him also sent a message to Stagg, 
who removed himself from further involvement in the case. The ball was once 
again in Cage's court. Should he go for a retrial? Plenty of people told him he 
should drop the case, but he decided to go for it. One more time. You could have 
almost heard Beebe's sigh of despair. Stagg was gone and Cage was back. 

Beebe's fourth trial was set for May 31, 1988. But this time Cage had 
company. The U.S. attorney in Texas had indicted Beebe on charges stem- 
ming from Cage's investigation, including a $4.4 million loan Beebe had 
gotten from State Savings/Lubbock. I'he one-two punch was too much for 
Beebe. And with Judge Stagg out of the case, who knew what the new judge 
would be like? 

In March, Beebe told the Shreveport Times he'd done nothing wrong and 
"this is a bunch of bull." But on April 29 he threw in the towel and cut a 
deal. ... He agreed to plead guilt>' to two counts of bank fraud and he agreed 
to cooperate with the ongoing criminal investigations into fraud at banks and 
S&Ls in Texas and Louisiana. In return the government agreed not to prosecute 
him for any other fraud then under investigation in northern Texas (which 
excluded large parts of Texas) or western Louisiana. Beebe's lawyer said Beebe 
pleaded guilty because he was out of money and wanted to put six years of 
litigation and harassment behind him. 

At his sentencing, before a Louisiana judge, Beebe sat in silence while the 
three lawyers representing him — former Louisiana Governor David Treen, for- 
mer Shreveport II. S. Attorney J. Ransdell Keene, and Jim Adams — argued 
vigorously that Beebe should not have to serve any time in prison. Cage was 
also mysteriously silent, not challenging Beebe's attorney and not demanding 
that Beebe do some time. As a result U.S. District Judge John M. Shaw, who 
could have sentenced Beebe to ten years in prison, gave him instead only a year 
and a day. Later Shaw .said Cage had not asked for any jail time for Beebe, but 
"I just felt he had to see the inside of a jail. " 

When word got out that Beebe would spend, at the most, a year in prison. 
Cage was widely criticized for devoting so much time to the Beebe pursuit and 
then not fighting for a stiffer sentence. In response Cage .said Beebe had agreed 
in the plea bargain to give "complete, truthful, and accurate information and 
testimony, " and Cage expected him to cooperate in the pro.secution of other 
bank frauds that he hoped would land bigger fish. If he didn't. Cage said he 
and the Texas prosecutor could drop the plea bargain and prosecute Beebe. 

Round Three • 259 

Besides, Beebe now had three felony convictions (the 1985 conviction and the 
two included in the 1987 plea bargain) and that ought to be sufficient to keep 
him out of the banking business. 

Bigger fish? What bigger fish? Bigger than Beebe? Carlos Marcello was 
already in prison. Who was left that was bigger than Beebe? 

Cage had turned his sights on Judge Edmund Reggie. He had begun to dig 
into financial transactions at Judge Reggie's Acadia Savings and Loan in Crowley, 
Louisiana. Though Cage would not discuss his investigation, which was still in 
progress when we went to press, the FSLIC filed a civil suit in 1988 
against Reggie and other officers and directors of the thrift (citing 20 loan trans- 
actions, involving over $40 million, that regulators alleged caused the collapse 
of Acadia in August 1987) and in that suit we could see the direction Cage's 
case might be taking. '' 

Between 1982 and 1986 Acadia Savings had, according to regulators, made 
several loans that benefited Beebe and Judge Reggie. (Our favorite was the loan 
that went to bail Reggie family members out of the Daddy's Money Condo- 
miniums.) But even more interesting, regulators said that in June 1985 the 
Acadia Savings board had loaned Gilbert Beall (of Texas and Florida) and Fred- 
erick Mascolo (of Connecticut) each $2.95 million. The collateral for the loans 
was 106 acres in an area in the Pennsylvania Poconos where gambling was under 

The Poconos property rang a bell with us, and we located it in our Aurora 
Bank file. Documents in our file showed that Beall and Mascolo had acquired 
the property from Anthony Delvecchio and Jilly Rizzo, whom we had met at 
Flushing Federal working with mob stockbroker Mike Rapp. Aurora Bank in 
Denver had been busted out in 1984 and 1985 by John Napoli, Jr.'s racketeering 
scheme. The FDIC sued Rizzo and Delvecchio (and others) in the case,^ alleging 
that Rizzo and Delvecchio tried to hide their Aurora Bank take from the FDIC 
by laundering it through the Poconos property. When Rizzo and Delvecchio 
sold the property to Beall and Mascolo, regulators in Colorado and Pennsylvania 
filed lawsuits claiming that the sale was a sham attempt to keep the FDIC from 
confiscating the 106 acres.* 

Even more troubling to Cage, however, was what Beall and Mascolo alleg- 
edly did with the $2.95 million they each borrowed — and never repaid — from 
Acadia Savings. Regulators alleged they spent only about $700,000 on the Po- 
conos property. The rest, they said, was divided up: 

Beall and Mascolo allegedly bought $2 million worth of stock in Lou- 
isiana Bank & Trust of Crowley, where Reggie was also a stockholder 
and was chairman of the board. The bank was about to collapse, reg- 
ulators said, and they saw this move as a way for Reggie to recapitalize 
his troubled bank. 


They loaned another $490,000 of the money to a Reggie partnership, 
which secured the loan with an lOH from Beebe's AMI, the FSLIC 

And they bought $1 million worth of stock in a company controlled by 
themselves in partnership with Mike Rapp's associate Lionel J. Reifler,'' 
who was also said to be involved in the plans to develop gambling on 
the Poconos property. Reportedly they also paid Rcifler another $500,000 
that Mascolo owed him. 

Regulators alleged that Acadia Savings had made another such loan. In May 
1985 Acadia loaned $1.8 million to a company to buy 154 St. Tropez tanning 
beds, but they said much of the money really went to Rcifler, Ma,scolo. and 
Beall. When regulators tried to file a claim with the company that bonded the 
loan, it turned out to be an offshore company in the Grand Cayman Islands 
and it didn't have enough money to pay the claim. 

Cage had been untangling these relationships at the very time that Beebe's 
high-powered attorney, Gerr>' Spence, had attacked him personally in open court 
and asked the judge to remove Cage from the Beebe case. At that time Cage 
had retired from the field of battle and prepared a blistering written rebuttal that 
not only attacked Beebe but laid out Beebe's relationship with Reggie in damning 
detail. We obtained a copy of the extraordinary' affidavit, which Cage had filed 
with the court. 

In the affidavit Cage tore into Beebe, Governor Edwards, Judge Reggie 
and their relationship to each other. He was worried, he said, about their plans 
to bring casino gambling to Louisiana"' and he was worried about what he 
called "the Reggie connection with organized crime, Mafia, or La Cosa Nostra 

Cage told in his affidavit about the Acadia Savings loans that he said indirectly 
benefited Rcifler. He said that Reggie's Louisiana Bank & Trust of Crowley in 
1985 had made $1.5 million in loans (secured by worthless annuities) that 
"benefited Reifler and Reggie." He quoted the Woodie Guthrie line — which 
was the source for the title of Jonathan Kwitny's book. The Fountain Pen 
Conspiracy — to point out that Rcifler appeared in Kwitny's book'- as an associate 
of Edward Wuensche, one of the nation's leading dealers in stolen securities 
who worked with Reifler at the same time that he (Wuensche) was deeply in\olved 
with the New Jersey mob." 

In his affidavit Cage pleaded with the court to understand that he was not 
some obsessed prosecutor: 

"[My] motivation was and is not political but one of grave concern for the 
stabilitv of the financial institutions in the Western District of Louisiana. The 

Round Three • 261 

appearance of organized crime in the Western District of Louisiana, likewise, 
causes [nie] a great deal of concern. The indicia of organized crime is truly 
frightening and worthy of the most relentless pursuits hy those in law enforce- 

The Cage affidavit infuriated judge Reggie. He told coauthor Mary Fricker 
that he believed Cage was pursuing him for political reasons (Cage was a Re- 
publican appointee). "The Cage affidavit is absolutely a lie. That affidavit did 
more to damage me than anything in my lifetime. ... He [Cage] has made 
me a target of his investigation for nearly seven years. ... If he thought I had 
connections with the Mafia, where was his evidence?" Reggie said he met Reifler 
through Beall, who had been an attorney with Fulbright and Jaworski in Houston. 
All of the Beall loans were approved in advance by state regulators, he said, 
and, anyway, by that time he was no longer active in the thrift's affairs. 

In regard to the FSLIC civil suit, Reggie told us he had never benefited 
improperly from any of the S&L's transactions. "I never drew a single expense 
account. 1 never charged them a nickle. Never charged them a legal fee.'"* 
Because we loved the savings and loan. I bet not another law firm in America 
can say that. That's why my feelings are just crushed. . . . Iloved Acadia Savings 
and Loan." 

"Yeah, he loved it to death," one Reggie critic quipped. 

Cage agreed. In May 1989 the grand jury indicted Reggie for bank fraud. 
A week earlier Beall and Reifler had pleaded guilty to violating banking laws 
and were said to be cooperating with Cage's investigation. Just five months earlier 
the SEC had charged the two men with fraud in connection with a Boca Raton, 
Florida, penny stock scam. Both the Acadia Savings and the SEC cases were 
pending as of this writing. Whatever the outcome, Acadia Savings had clearly 
been victimized by the hit-and-run gang of swindlers we knew very well. 

In July 1988 Herman Beebe finally went to prison, courtesy of Cage and 
Blount. But his sentence was only one year and a day. We well remembered 
his words to reporter Linda Farrar, "I'll be right back on top after two or three 
years," and we didn't doubt it for a minute. Beebe had opened a window for us 
into the world of banking as it was done "down home" in Texas and Louisiana. 
TTie mob was active there, but in addition there was a good-ole-boy "mob" that 
had been fleecing financial institutions as a matter of birthright for generations. 
A group of Arkansas-Louisiana-Texas businessmen with the most powerful po- 
litical connections had been using financial institutions for their own purposes 
for years. Fiduciary duty meant little to them. They ran their banks the same 
way they would have run their cattle ranches. They walked the thinnest possible 
line between legal and illegal, and some of them regularly crossed that line. 


The occasional attempts to blow the whistle on the ring went nowhere. Regu- 
lators, prosecutors, and reporters came and went, but the Southern power struc- 
ture remained. 

The wholesale looting that occurred in the thrift industr>' in Texas and 
Louisiana (and later spread to surrounding states) in the 1980s would not have 
been possible in an environment that unambiguously condemned such behavior. 
Texas and Louisiana, in particular, lacked such an ethic. In fact, when it came 
to changing management at a bank or thrift, the attitude was perhaps best 
characterized by what a voter said when Edwin Edwards was finally defeated as 
governor. Asked if he felt the new governor and his people might be more honest, 
he replied, "No, it's just turning the fat hogs out and letting the lean hogs in." 
So it was with Texas and Louisiana banks and thrifts. The U.S. taxpayer will 
pay a high price for that erosion of ethical business standards — an erosion fa- 
cilitated and exacerbated by deregulation of the thrift industry, which sent the 
wrong message to the wrong people. 


A Thumb in the Dike 

The last three years had been very difficult for Ed Gray. When he took the job 
of Federal Home Loan Bank Board chairman on May 1, 1983, he was the 
darling of the thrift industry's chief lobbying group, the U.S. League of Savings 
Institutions, and a Reagan administration insider. Eighteen months later it would 
have been hard to find anyone to say a nice word about him. The U.S. League 
worked overtime to lobby against his proposed regulations, and forces high in 
the administration worked for his ouster — all because of Gray's attempt to stem 
the avalanche of thrift failures by putting a lock on brokered deposits and by 
limiting a thrift's direct investments and rapid growth. In an administration where 
any form of deregulation was applauded. Gray had become an outcast, "the 
great re-regulator. " 

Ed Gray could not have been prepared for this fire storm. No FHLBB 
chairman in the entire 50-year history of the post had been faced with the kind 
of crisis Gray faced. The job had always been an easy one, with clearly defined 
responsibilities, chief among them being to do the thrift industry's bidding. The 
chairman was expected to serve out his relatively low-paying post ($79,000 a 
year), after which he would be rewarded with a well-paying thrift industry po- 
sition. But these were not ordinary times. The seeds of the thrift crisis had been 
planted nearly three years before Gray arrived, but it was Ed Gray who faced 
the bitter harvest. 

Texas thrifts had reacted most violently to Gray's restrictive regulations. A 
"get Gray" movement began to take form in Texas, spearheaded by Texas thrift 
lobbyist Durward Curlee and loan broker and Republican activist John Lapaglia. 
Lapaglia, whom we had originally encountered brokering loans for Norman B. 
Jenson and Philip Schwab, owned Falcon Financial in San Antonio. He fired 
the opening salvo with a full-page ad attacking Gray's new regulations. ' The ad 
was entitled "An Open Letter to the Congress of the United States. " It ran in 


the Dallas Morning News during the Republican National Convention in August 
1984. Lapaglia followed up by stalking the halls of the convention handing out 
copies of his weekly newsletter. Falcon Newsletter, to attendees. The newsletter 
became a weekly denunciation of Ed Gray and his policies. Lapaglia told us he 
mailed the letter to 380 Southwestern thrift executives. 

In September Lapaglia shot off a letter to President Reagan. He complained 
bitterly that Ed Gray's policies were strangling the Texas thrift industry, which 
had been doing just fine before Gray began to interfere. He begged the president 
to do something about Gray. But he also knew an election approached, and he 
let the president know that if Reagan didn't fire Gray right away, he would 

We are very mindful of our obligations to not raise sensitive issues until 
November; accordingly, 1 shall personally take no action that would not be 
beneficial to the Administration. After that time I expect to lead an industry- 
wide effort, which at this moment consists of fifty-five savings institutions, 
in bringing a class-action suit against Chairman Edwin J. Grey [sic] and the 

Lapaglia kept his word and waited until after the November elections before 
acting. Then in December, he told us, he organized a trip to Washington. D.C. 
He was accompanied by thrift attorney Robert Posen,- John Mmahat, who was 
CEO of Gulf Federal Savings of Louisiana, and singer Wayne Newton, whom 
Lapaglia said was "having some problems with millions in loans he had on a 
resort in the Poconos."' Also attending the Washington meeting were Texas 
thrift lobbyist Durward Curlee^ and Frank Fahrenkopf, Jr., chairman of the 
Republican National Committee. They met with Danny Wall in the offices of 
the Senate Banking Committee, which was chaired by Senator Jake Gam. Wall 
was Gam's chief administrative aide. (In 1987 Wall would succeed Ed Gray as 
chairman of the FHLBB.) Posen, who led the meeting, protested to Wall that 
Gray's new policies were too extreme and they would strangle the industry. Wall 
listened but did not respond. 

Suddenly the secretary stuck her head in the room. "Mr. Newton, the First 
Lady is on the phone for you." (Newton was a close friend of the Reagans.) 

Newton left the room to take Nancy Reagan's call. When he returned the 
meeting resumed. A few minutes later the secretary knocked. "Mr. Newton, the 
phone again. It's the president." 

Newton left the room again, returning a few minutes later to summon 
Fahrenkopf. "The president wants to talk to you now, Frank, " he told Fahren- 

When Fahrenkopf returned from talking to the president, he called the 
meeting to a close, telling the others that he would look into the matter. Ac- 

A Thumb in the Dike • 265 

cording to Lapaglia, President Reagan had asked Fahrenkopf to rein in FHLBB 
chairman Ed Gray. Mmahat later descrilied the meeting in a manuscript he com- 
missioned entitled "To Kill An Eagle." He summed up the outcome of the 
meeting: "It later became clear that Gray's friend, supporter and sponsor, At- 
torney General Edwin Meese, prevailed over any influence that Wayne Newton 
and the Chairman of the Republican National Committee had with the Pres- 
ident of the United States. As a result of that support, Edward Gray continued 
on his course of conduct which, it is now clear, aggravated the present crisis." 

Like so many who villified Gray, Mmahat exaggerated Gray's involvement 
in day-to-day details. As extraordinary as this meeting and conversations with 
the president were. Gray later told us he was unaware the meeting even occurred 
and denied Fahrenkopf ever put any pressure on him about FHLBB policies in 
Texas. Fahrenkopf himself characterized the above account of the meeting as 
"pure fiction." Gray did tell us, though, that at about that time he began giving 
Fahrenkopf regular briefings on his actions in Texas because he felt that Fah- 
renkopf had the president's ear. 

"I'd been told by a high White House staffer to stay away from the White 
House," Gray told us. "He told me that if I made an appointment with the 
president, Don Regan would bad-mouth me before I got there, sit in on the 
meeting, and bad-mouth me after I left." So, Gray said, he hoped he could get 
his messages to Reagan through Fahrenkopf 

The appearance of Frank Fahrenkopf at that meeting was puzzling. What 
stake could the Republican National Committee have in all this? Maybe Fah- 
renkopf was responding to Lapaglia's warning that Gray's actions could cost the 
party the support of the thrift industry. But we learned that he also may have 
had a business relationship to protect. According to the Colorado Springs Gazette 
Telegraph, Fahrenkopf and Newton — for whom Fahrenkopf sometimes per- 
formed legal services' — were at that time involved in a complex transaction with 
the holding company of United Savings Bank (a thrift) in Wyoming. Fahrenkopf 
was borrowing $100,000 and Newton $200,000 to invest in an RV park in 
Bullhead City, Arizona, not far from Las Vegas. ^ The RV investment was being 
orchestrated by a Las Vegas loan broker, John Keilly, who had shown up in our 
Centennial investigation — he had introduced Norman Jenson to Sid Shah. (In 
the 1970s Keilly did 27 months in prison for bribery in connection with a $1.25 
million loan from a Teamsters Union pension fund, according to published 
reports.) Another investor in the Bullhead City RV park was John Pilkington, 
described to us by a Nevada Gaming Control Board investigator as a longtime 
associate of Morris Shenker. 

So Newton had at least two reasons to support thrift deregulation: one in 
the Poconos and one with partner Fahrenkopf in Bullhead City, and Fahrenkopf 
may also have had his own investments in mind at the Washington meeting 
with Wall. 


Gray was still struggling at that time to get a sense of just how big a problem 
he had on his hands. His examiners in the field were giving him one story — 
that the situation was bad and getting worse — while industr)- "experts" were 
saying that the problems were temporar\', caused by the recession, and were 
nothing to worry about. Gray received a letter fi^om respected economist Alan 
Greenspan (later to he appointed Chairman of the Federal Reserve Board) telling 
him he should stop worr\ing so much. Greenspan wrote that deregulation was 
working just as planned, and he named 17 thrifts that had reported record profits 
and were prospering under the new rules. Greenspan wrote the letter while he 
was a paid consultant for Lincoln Savings and Loan of Irvine, California, owned 
by a Charles Keating, Jr., company.' Four years after Greenspan wrote the letter 
to Gray, 15 of the 17 thrifts he'd cited would be out of business and would cost 
the FSLIC $? billion in losses. 

Gray's regulation limiting direct investments and growth had finally taken ef- 
fect in mid-March 1985 and a lot of thrifts did not measure up. Centennial Sav- 
ings, Vernon Savings, Flushing Federal — the list ran into the hundreds. The 
U.S. League had opposed the new regulation fiercely before it was adopted by the 
Bank Board, but they suddenly changed sides when they saw Gray had Senator 
William Proxmire, the powerful Senate Banking Committee chairman, on his 
side. Also, the growing number of thrift failures had begun to scare the League. It 
was becoming clear that accommodating the bad-boy S&Ls was eventually going 
to cost the other thrifts billions. In fact, they realized, if the carnage were really se- 
vere, it could lead to public pressiue to re-regulate the entire industry. 

But in Congress the old adage that money was the mother's milk of politics 
held true. P'ollowing deregulation the thrifts became the cows, and there were 
certain congressmen who never missed a milking. Go-go thrift operators had 
plenty of money, and they were sharing it with their friends in Washington. 
We'd already seen that Congressman Tony Coelho (D-Calif. ) had nuzzled right 
up to Don Dixon at Vernon; Congressman Doug Bosco (D-Calif. ) had Erv 
Hansen at Centennial; and Speaker Jim Wright (D-Tx. ) had Tom Gaubert at 
Independent American in Dallas. Now we learned that Charles Keating, Jr., 
his employees, business associates, friends, and family had donated $220,000 
to Arizona politicians, $85,000 to California worthies, $34,000 to Ohioans, and 
more— $440,000 in all. 

While Keating and his associates were giving politicians money, Ed Gray 
was giving them only headaches. No sooner had Gray's direct investment reg- 
ulation gone into effect than 220 members of the House of Representatives had 
signed a resolution asking the Bank Board to delay the implementation of the 
new rule. Congressional hearings were scheduled for late March 1985: 

Representative Frank Annunzio (D-lll.) looked down the long table at Gray, 

A Thumb in the Dike ■ 267 

U.S. League President Bill O'Connell, and others who had eomc to testify in 
favor of the direct investment regulation. 

"We ask that the agency postpone the effective date of this rule," Annunzio 

"I'hat's impossible, Congressman," Gray said he replied. "It's been in effect 
since March 18." 

Annunzio countered, "The Bank Board is acting too hurriedly in putting 
the regulation into existence. It could well be the beginning of the end to the 
dual banking system in this country."* 

Gray reminded the congressman, "It's the FSLIC, not the states, that has 
to pick up the tab for thrift failures, Congressman." 

Annunzio was unswayed and again demanded that Gray delay applying the 
new regulation. 

"Mr. Annunzio" — Gray bristled — "if it is rescinded or postponed, losses 
. . . will fall squarely on the shoulders of the Congress itself We cannot delay 

Gray said Annunzio flushed with anger, took a deep breath, glared down 
the table, and then stormed out of the hearing room in protest. With Annunzio 
gone, Representative St Germain, chairman of the House Banking Committee, 
finally came to Gray's aid. He said he agreed with the Bank Board's new reg- 
ulation, adding, at long last, that he had little sympathy for thrifts that asked for 

"They can just go jump in a lake," St Germain said as he gaveled the hearing 
to a close. 

Everyone knew the fight couldn't be over. There were too many shaky thrifts 
across the country that would not be able to survive under Gray's new rules. If 
they had to dispose of some of their direct investments, which they were carrying 
on their books at inflated prices, their houses of cards would tumble because 
they would have to take large losses. Still, the regulation went into effect and 
FHLBB examiners across the country began measuring thrifts by the new yard- 
stick. Then Gray had to turn his attention to another old problem. There weren't 
enough examiners. Gray needed more eyes and ears in the field if he was to 
enforce his new regulation. He had 3,200 thrifts (handling a trillion dollars in 
deposits)"* but his examination staff numbered only 679. That was about one 
examiner for every four and a half thrifts. Some institutions had gone over two 
years without an examination. Gray figured he needed to double his examination 
staff, at least, if he was to effectively enforce his new regulation — or any of the 
old ones for that matter. 

Gray picked up the phone and called Dave Stockman at the Office of 
Management and Budget. Stockman held the purse strings and would have to 
approve any increase in staff at the Bank Board.'" But Stockman had no interest 
in helping Gray, who a year earlier had humiliated him by shooting the FCA 


job out from under him, and Gray had to meet with his assistant, Connie 
Horner. Horner said she was a busy person, but she said she could squeeze him 
in over lunch at the White House. 

As Gray walked through the iron gates of the White House on the way to 
the executive lunchroom, he reflected that the root of the thrift problem was 
the "high fliers," as he liked to call them — the wild and crazy guys like Dixon, 
McBirney, and Hansen. Gray had made his high-fliers speech many times, and 
that day he planned to tell Horner again that high fliers were using brokered 
money to engage in risky and complicated in\estments, many of them fraudulent. 
To stop the abuses he needed more examiners to ferret the con men out of the 
system. Gray had butted heads with Horner over staffing before, but he was sure 
this time she'd sec the wisdom of his case. 

As they settled in for lunch at the White House senior mess, an oak-paneled 
dining room where only the cabinet and senior aides to the president were allowed 
to dine. Gray laid his cards on the table. He wanted to double the examination 
staff to 1,400. What's more, with a turnover rate exceeding 30 percent, he 
needed to raise examiners' base pay from an average of $14,000 a year to a level 
more competitive with private industry examiners. Gray said Homer ate and let 
Gray talk. She had been through all this with him before. Like the Dickens 
character in Oliver Twist, Horner always responded the same way to Gray's 
requests for additional staff: "You want more examiners?? " 

She told him it wasn't a matter of money but of philosophy. The admin- 
istration's philosophy was one of deregulation. That meant fewer regulators, not 
more. As Gray listened to her recite the administration mantra, he reflected on 
her own bloated staff. Each time Horner trooped over to his office for a meeting 
she dragged with her a staff of eight. They filed in behind her like baby quail 
behind their mother. He could never understand why she brought them along, 
since they never seemed to do or say anything. 

Gray looked around the lunchroom while Horner lectured, noticing how 
much the senior mess resembled the interior of a ship. Horner speculated out 
loud that maybe, just maybe, she could swing 30 more examiners for him if 
Gray would be more cooperative and get back into step with the administration. 
Gray said Horner also issued a thinly veiled warning, reminding Gray of his 
expense-account troubles. She even suggested he could go to jail if his overages 
proved to be a violation of something called the "Anti-Deficiency Act," which 
mandated how much the Bank Board could spend. Gray was already over that 
amount, she claimed, way over it. Gray said there must be some mistake and 
he'd clear it up. (A few months later it was discovered that an OMB accountant 
had "misplaced" a decimal point and Gray was, in fact, within his budget.) But 
the message Horner sent was clear: The administration could play hardball with 
one of its own if that person strayed too far off the reservation. 

Gray, however, had a card up his own sleeve. His months of being knocked 

A Thumb in the Dike • 269 

around by Washington pros had taught him that he wasn't going to make any 
friends in this job anyway and hardball was the only way to play the game if 
you wanted to win. 

"Okay, Connie." Gray said when she finished her speech. "Then I'm trans- 
ferring the examiners to the district banks." 

Horner was stunned. What Gray was proposing to do was to transfer re- 
sponsibility for all future thrift examinations and supervision from Wasiiington 
to the 12 district banks across the country. The district banks, although an- 
swerable to the Bank Board in Washington, were independent entities, owned 
and operated by the thrifts within their district. " The FHLBB had oversight over 
the 12 district banks, but the OMB did not. hi making such a transfer Gray 
would remove any authority OMB had over the number of examiners the FHLBB 
had or how much they were paid.'- 

"You mean you're going to have nongovernment employees regulating?" 
Horner gasped. 

"They're already doing it," Gray said. "I don't see a problem with it." 

Horner, Gray recalled, just glared at him across the remnants of lunch. 
Although decentralization of federal government was one of the goals of Rea- 
ganomics, transferring 700 federal examiners away from the interfering hands 
of the White House and Congress was something else. 

"Well, I've got to get back to the office, Connie. Thanks for the lunch." 
Score another one for Gray. 

A week later Horner trooped into Gray's office at the Bank Board, her eight 
assistants in tow. "I'll offer you a deal, Ed," she snapped, sitting herself down 
at a large dining-room table Gray had had brought to the office for such meetings. 
The table sat only six comfortably, so Horner's staff had to squeeze in around 
the edges. "If you agree not to transfer the examiners to the district banks, I'll 
give you 39 new ones," Horner said, as though she were making a major arms- 
control proposal. 

Gray was flabbergasted. He looked around the table at the blank expressions 
on the faces of Horner's staff. Finally, running his hand through his thin gray 
hair, Gray told her it was a deal he simply could not make. 

"Really, Connie, I need 1,100 examiners," he insisted. 

As soon as Horner and her minions trooped off. Gray, his general counsel. 
Norm Raiden, and his chief of staff, Ann Fairbanks, finalized the transfer of 
the examiners to the district banks. The move, effective July 1985, greatly 
strengthened the district banks and got Washington bureaucracy out of their 
lives — two things the industry liked. Gray told the district banks to begin making 
arrangements to bring on board at least 700 new examiners immediately and to 
raise starting salaries from the current $14,000 to a more competitive $21,000," 
The transfer of examiners was accomplished just at the hme that Centennial 
Savings and Consolidated Savings were teetering on the brink. 


If Gray's end run around OMB made him some new friends outside Wash- 
ington, it did nothing for his standing on Capitol Hill or for the congressmen's 
vocal thrift constituency. The last thing in the world Don Dixon and his kind 
wanted was more examiners. To their mind there were too many regulators 
poking their noses into thrifts' books already. Those S&L owners, heavy con- 
tributors to congressional and senatorial candidates, renewed their call for Gray's 
ouster. First he had attacked brokered deposits, the lifeblood of the industry, 
then he had limited direct investments and growth, and now he was sending 
700 more examiners into the field. He also was insisting that supervisors on the 
district level issue supervisory agreements and cease-and-desist orders more firmly 
and promptly. He was very unhappy with what seemed to him to be a lax 
enforcement of his new regulations. '■* 

In the midst of the intramural skirmishing Gray was making regular trips to 
Capitol Hill to answer questions from angry congressmen on various committees. 
He and his general counsel. Norm Raiden, took a particularly tough grilling in 
July before a House subcommittee'' investigating the failure of Beverly Hills 
Savings in April. Before Raiden had become general counsel for the FHLBB 
he had been an attorney with the Los Angeles firm of McKenna, Connor and 
Cuneo (one of the top S&L law firms in the country), and he had represented 
Beverly Hills Savings during the time that Beverly Hills management was making 
insider loans and speculative investments.'*' Congressmen accused Raiden of 
"severe and extreme conflict of interest" in his handling of the Beverly Hills 
case after he became counsel for the FHLBB. Gray defended Raiden (and kept 
him in his post), and Raiden denied any conflict of interest.'" 

Representative Thomas A. Luken then called Gray on the carpet for not 
acting sooner against Beverly Hills, saying "Mr. Gray is following an Alice-in- 
Wonderland approach" to thrift problems. He said the FHLBB "lacks the in- 
centive to take aggressive action." 

Gray replied that "a very important contributory factor" to the lack of time- 
liness in dealing with Beverly Hills was a shortage of examiners, which had now 
been corrected by transferring them to the F"HLBs. 

Luken then demanded that Gray "do the decent thing and resign" because 
he had implied that he couldn't do the job with the personnel he had. 

Representative John D. Dingell (D-Mich.), chairman of the subcommittee, 
came to Gray's defense, saying that it was "a national disgrace ' that the Bank 
Board lacked the funds to have a sufficient and prop>erly trained examination 
force. Dingell, on several occasions during the hearings, characterized Gray as 
"an honorable man, " but he denounced Raiden for his failure to stop the abuses 
at Beverly Hills when he was the thrift's attorney. '* 

In other appearances on Capitol Hill, Gray testified on the worsening con- 
dition of the industry' insurance fund, the FSLIC. The insurance fund. Gray 
said, did not have enough money left to close all the insolvent thrifts. He 


A Thumb in the Dike ■ 271 

projected tluit the cost would run into tlic billions of dolhirs. In July lie testified 
the FSLIC would need $15 billion to clean up the industry. His numbers were 
based on a report by Bank Board economist Dan Brumbaugh. Congress was 
stunned. Where would the industry get that kind of money? 

Gray was at such a hearing when his driver tiptoed into the hearing room 
and whispered in his ear. "Sir, there's an urgent call for you on the car phone." 
It was Bank Board member Mary Grigsby. She asked Gray to call her back on 
a regular phone. She didn't want to discuss this matter on the car phone where 
it could easily be monitored by any ham radio operator. 

When he returned to the office he called Grigsby. 

"Ed, I just got a phone call from someone representing a sukstantial Cali- 
fornia savings and loan," she said. "They want to offer you a job." 

"Who?" Gray asked, wondering who thought he might be available. Spec- 
ulation was always floating around Washington that he was leaving office, but 
he had denied all the rumors. 

Grigsby didn't want to be more specific over the phone. Gray said he'd be 
available to chat later that afternoon, and he set a time for Grigsby to meet him 
at his office. When she arrived she told him just who the suitor was. It was 
Charles Keating, )r. , of American Conhnental Corporation (which owned Lin- 
coln Savings and Loan in Irvine, California), a leader of the chorus that was 
singing for Gray's removal. 

The offer stunned Gray. He knew regulators were crawling all over Lincoln's 
books and complaining that Lincoln was in gross violation of his new direct 
investment regulation. Lincoln was one of Gray's nightmare thrifts. (Lincoln 
grew ft-om $2.2 billion in deposits in 1984, when Keating's company acquired 
the thrift, to $4.2 billion by 1987, and some of that money was invested in high- 
risk junk bonds.) In 1985 regulators said Lincoln had only $54 million in 
passbook accounts and $2. 1 billion in large CDs. 

Gray told us he consulted Bank Board general counsel Norm Raiden on the 
Keating offer. "He wants to get you out of the way," Raiden told Gray. The 
offer had been a vague one, so Gray sent Ann Fairbanks to a breakfast meeting 
with Keating to verify that this was a real offer. She came back and said that it 
was, though later Keating denied ever making such a proposal, just what Keating 
might have been prepared to pay Gray was never disclosed. Executives at Amer- 
ican Continental Corporation were very well paid. Keating, who earned $1.9 
million in bonuses and compensation in 1987 as head of American Continental, 
was reportedly the second highest-paid executive in the thrift industry. Three 
other American Continental executives, including Keating's son Charles Keating 
III, were among the ten highest-paid industry executives. Keating the III made 
$863,494 in 1987. Another son employed by Keating's American Continental 
Corporation was Mark Connally, son of the powerful former Texas Governor 
John Connally. 


Keating, with palatial estates in Arizona and the Bahamas, private jets and 
helicopters, was rich beyond Ed Gray's dreams. He had a reputation as an anti- 
pornographer and a philanthropist, and one of his favorite charities was politi- 
cians. He also encouraged his friends, employees, and business associates to 
contribute. Keating knew no political party. His largesse flowed equally to Dem- 
ocrats and Republicans alike. 

Though now head of a multibillion-dollar thrift empire (Lincoln Savings 
made up about 85 percent of American Continental Corporation's assets), SEC 
documents revealed that in 1979 Keating had been accused by the Securities 
and Exchange Commission of misusing bank funds in Ohio by lending $14 
million to friends and associates between 1972 and 1976. The SEC alleged that 
Keating, Carl Lindner, and Donald Klekamp, all officers of American Financial 
Corporation of Cincinnati, used Provident Bank, which American Financial 
controlled, for their own benefit. They accused the three men of a long list of 
SEC violations, including permitting Provident Bank to make loans to them 
without collateral, extend them new loans to cover the interest they owed on 
the old loans, roll over loans as they matured without demanding payment, and 
guarantee loans that other banks had made to Keating and others. 

Keating and two associates consented to the SEC judgment without admitting 
or denying the allegations in the SEC complaint. After reading the charges, and 
even knowing that the SEC never had to prove them in court, we still wondered 
how Keating later got control of a thrift. In late 1988 published reports revealed 
that Keating, through American Continental, had gotten caught up in another 
SEC investigation, this one centering around MDC Holdings Inc. (a major 
borrower at Silverado Savings in Denver and an associate of a Southmark sub- 
sidiary), and that the SEC was investigating American Continental's accounting 

Gray said he turned down Keating's job offer without ever talking to him. 
When a reporter from the National Thrift News called Keating and asked if he 
had tried to hire Gray away from the Bank Board, Keating simply said. "No. 
That's all I have to say at this time. Good-bye." Click. 

Though Gray turned Keating down, he was thinking that it was time for 
him to keep his promise to his wife and bow out of the Washington scene. After 
all, he'd already stayed on several months longer than he had meant to. But he 
had no intention of being forced out. He was determined to orchestrate his own 
departure from public life. But his enemies were impatient, particularly Don 
Regan, who now decided it was time to put the pressure on Gray again. He 
knew Gray was on the outs with a lot of people in the industry, most recently 
because Gray had told them the insurance fund was down to $? billion in 
reserves to cover $1 trillion in deposits and member thrifts were going to have 
to set aside 1 p)ercent of their assets to make up the shortfall. 

That news was a sour pill that thrift officers did not want to take, and Regan 

A Thumb in the Dike • 273 

seized tlic moment to leak to The Wall Street jounial the "news" that Gray was 
resigning. It was Regan's way of saying to Gray, "Here's your hat. What's your 
hurry?" It was also no secret that Regan wanted his old friend, former stock 
exchange president James Needhain, in Gray's place. 

When reporter Monica Langley of The Wall Street journal called Gray for 
comment on the rumor that he was resigning, Gray was stunned. 
"I am?" he said. "I think I'd know if I was resigning." 
Langley told Gray she had gotten the news "from the highest possible au- 

"You mean the president?" Gray asked, half fearing the answer. 
"No," Langley responded, but a very high source. 
Ah, Gray thought . . . Don Regan. Gray was tired and mad. 
"No, I'm not resigning," he told Langley, and he hung up the phone. At 
that moment Gray knew he was going to have to break that promise he kept 
1 renewing to his wife that he would retire soon. He was staying on. 
i The decision brought with it more than personal hardship. It meant financial 
: hardship as well. Gray's $79,000-a-year salary was quickly eaten up by the cost 
of living in Washington and maintaining a home base in San Diego. He also 
had two daughters in college. Gray said he took out small personal loans from 
; Washington banks to support himself. He even borrowed from his mother. (By 
the time he left the Bank Board his personal loans exceeded $80,000, Gray said.) 
He chaffed at the thought of having to scrape and beg while people like Don 
Dixon and Ed McBirney and Gharles Bazarian lived the life of Reilly. 

But once again Ed Gray had outfoxed the Washington pros. One could 
I almost hear the sighs of frustration when they read Gray's remarks in The Wall 

Street Journal: "Resigning? Why no. I'm staying on." 
: A week later White House spokesman Larry Speakes reaffirmed the admin- 
istration's support for Gray. "Ed Gray can stay as long as he wants," Speakes 
\ said. 

By the time 1985 rolled to a close it looked to Gray as though he might 
finally have turned the corner. They'd passed the regulations to curb direct 
investments and growth, and they'd gotten more examiners in the field — major 
accomplishments that should at least hold the high fliers in check while regulators 
and law-enforcement officials mopped up the damage that had already been 
done. As Gray flew out of Washington to spend the holidays with his family in 
San Diego, he felt the first optimism he had enjoyed in months. He sat back 
■ in his seat and watched from the window as his plane left Washington — and 
the thrift crisis — behind. He thought maybe the worst was over. 


The Touchables 

While officials at the Federal Home Loan Bank Board in Washington caught 
their breath, enjoying what they did not yet realize was simply a lull before 
another storm, pressure was building down the street at the Department of Justice 
to pay more attention to the thrift industrv'. But they were no more prepared to 
handle the thrift crisis than the FHLBB had been — and for many of the same 

The Department of Justice was understaffed. FBI special agents and U.S. 
attorneys in field offices around the country were battling a war on drugs that 
had already stretched them far beyond their resources. It took awhile for them 
to realize how many swindlers had infiltrated the thrift industry, and once they 
did they found they were woefully short of FBI agents and U.S. attorneys with 
accounting backgrounds who could unravel the paper trails of sophisticated bank 
fraud. Regulators who contacted the FBI for assistance were often put on hold 
— literally. 

"I had to phone the Los Angeles FBI office 17 times trying to get them to 
open a case when North American Savings and Loan failed," California Savings 
and Loan Commissioner Bill Crawford complained later. "After 17 calls an 
agent finally returned my call and told me. "Look, if you're telling mc that North 
American is more important to you than Consolidated Savings and Loan, I'll 
drop my Con.solidated investigation and come right over.' " If not, he said, he 
could get around to North American in about two years. ' 

Particularly in hot spots like Texas and California, the FBI simply did not 
have enough agents to investigate all the thrift fraud cases. In 198? the FBI had 
only 258 agents assigned to bank fraud investigations, and within a year they 
would have over 7.000 cases to investigate. Three years later there would be 
only 337 special agents to investigate what by 1987 would increase to over 1 1,000 
cases. To make matters worse, bank fraud was an incredibly complex white- 


The Touchables ■ 275 

collar crime. Each major case took from two to four years to investigate and 
prosecute. The FBI just didn't have tlie manpower. In San Francisco, for ex- 
ample, the FBI's white-collar crime unit had only ^4 FBI agents to handle not 
unlv bank fraud but also drug-money laundering, corruption of public figures, 
and espionage. Fart of their district ( 1 "> California counties from south of Mon- 
terey to the Oregon border) included Silicon Valley, which was waist-deep in 
spies try ing to get information on nearly $7 billion a year in Defense Department 
projects, rhe head of the San Francisco FBI office told us he needed nearly 
twice as many FBI agents (60) for his white-collar crime unit. 

Even if the FBI had the manpower, the I'nited States attorneys' offices did 
not have enough assistant U.S. attorneys to take the cases to court. When an 
assistant U.S. attorney took on a major thrift fraud case that attorney was lost 
to the department for up to two years. The cases were backbrcakers and budget 
busters. To make matters worse, there was a lot of turnover in U.S. attorneys' 
offices. Assistant U.S. attorneys could earn about $70,000 a year prosecuting 
federal cases for a few years and then retire to the private sector, where they 
could earn twice (or three times) as much representing the crooks. 

But something far more damaging than lack of manpower was undermining 
the Department of Justice's response to criminality within the thrift industry. 
The biggest threat to the proper prosecution of these cases — and the hope of 
deterring further such abuses — was the thrift and bank regulators' penchant for 
secrecy. Ironically, the best accomplice that thrift crooks had after they were 
discovered was the federal regulators, who secreted away the evidence of the 
crime and sat on it. 

On an increasingly regular basis, starting in 1985, FBI agents around the 
country saw thrifts in their jurisdiction being seized by federal regulators. Insiders 
or informants would tell them of massive fraud at the failed thrift, but regulators 
were referring only a handful of the cases to the ¥B\. The agents wondered why 
their phones weren't ringing off the hook. The Bureau contacted Federal Home 
Loan Bank officials and asked why they had not reported these alleged crimes 
to the FBI. The answer they got could have come right out of a Kafka novel. 

"We can't discuss these cases with you," they were told. "That would be 
against the law." 

The law the regulators were referring to was the Right to Financial Privacy 
Act, which Congress passed in 1978. It mandated that a person's business with 
a financial institution was privileged, like his business with his doctor, attorney, 
or priest. Regulators told FBI agents that, yes, many of the thrift failures had 
been caused by insider and customer fraud, but the law forbade regulators to 
discuss any thrift's relationship with any customer (which regulators interpreted 
as meaning even fraudulent relationships). And, no, they wouldn't be in a 
position to supply the agents with any evidence to help them in their investi- 
gations. That meant there could be no investigation because when the FSLIC 


seized an institution it sucked up every atom of information on the spot, and 
immediately it all became as secret as plans for the stealth bomber. Without the 
evidence that was in the regulators' possession, no United States attorney could 
hope for a conviction of a bank swindler. He needed those phony appraisals, 
postdated documents, fraudulent financial statements, endorsed checks.- 

The problem wasn't a new one. The Bureau had had earlier problems with 
banking regulators over the same issue. After the collapse of the Butcher brothers' 
banks in Tennessee in 1983, the FBI actually had to complain to a Senate 
subcommittee to get FDIC regulators to release the phony loan documents they 
needed to convict the brothers. The regulators fought the justice Department 
every inch of the way, leading The Wall Street Journal to wonder in an editorial 
if regulators might be worried less about bank secrecy than they were about what 
the documents said about their own ineptitude. 

"Since the FDIC was the main agency keeping watch over the Butchers' 
banks, its documents afford the best picture of what went on. But ever>' time its 
files have been subpoenaed it has asked the court for a sweeping protective 
order. . . . Similar cover-ups blanket a multitude of other cases, including one 
in which the defendants contend the plaintiff FDIC sought the protective order 
to 'hide its own culpability.' " .', 

Concerned that serious white-collar criminal investigations involving the 
theft of hundreds of millions of dollars were going nowhere while FBI agents 
fought with federal regulators in public over scraps of information, the Justice 
Department in December 1984 had called for a sit-down with regulators. To- 
gether they formed a joint working group to which they gave a $50 name: "The 
Attorney General's Interagency Bank Fraud Enforcement Working Group. " The 
group's mission was to mesh the needs of prosecutors, FBI agents, and bank 
supervisory personnel and to "identify, address, and resolve issues of major 
significance relating to the detection, reporting and prosecution of bank-related 
crimes, focusing especially on crimes by insiders of financial institutions."' 

The justice Department began to teach bank examiners how to spot bank 
fraud, and the P"BI began work on a computerized tracking system that would 
contain the names of known bank swindlers. When crooks moved from one FBI 
jurisdiction to another, agents could just type in their names and get a complete 
history on them. Unfortunately that system was not scheduled to go on line for 
several years. 

Regulators were told in no uncertain terms that the Right to Financial Privacy 
Act in no way prohibited them from releasing information to the FBI on susf)ected 
criminal activity at a financial institution. They were provided with criminal 
referral forms and told to file one anytime they had suspicion of a crime. But 
old habits died hard. To a regulator financial information was as sacred as the 
Holy Sacrament was to a priest. One just didn't hand something that precious 
to the uninitiated, the great unwashed — and particularly not to ham-handed 

The Touchables ■ 277 

FBI agents with lumps under their coats. Agents were still required to get a 
federal court subpoena for anything they wanted from regulators. 

An example of passive-aggressive behavior by Bank Board examiners was 
their "redacted" criminal referral, which satisfied the letter of the law while 
totally avoiding the spirit. One veteran I'Bl agent recalled his first run-in with 
a redacted criminal referral. 

"You would not believe it. It read kind of like this: 

Loan officer A made a loan to borrower B. Borrower B supplied fraudulent 
financial information on the loan application. Loan officer A knew the 
information to be false. Appraiser C supplied an inflated appraisal on the 
property. He and Borrower B and Loan Officer A knew the appraisal was 
false. When the loan was funded Borrower B paid Loan Officer A and 
Appraiser C $25,000 kickbacks out of the loan proceeds. 

"I called that character [the examiner] back and asked him just what he 
expected me to do with this piece of shit. I told him I couldn't investigate people 
with code names, that he had to put their real names in the referral. What the 
hell did those clowns call us for? They wanted us to investigate someone but 
they wouldn't tell us who?" (The FHLBB is the only agency in government that 
employs redacted criminal referrals.) 

Secrecy at the 12 district banks became an obsession and got even worse 
after Danny Wall succeeded Ed Gray at the FHLBB. If we called to speak with 
Bill Black or Mike Patriarca at the San Francisco Bank, at least one "listener" 
would stay on the line to make sure Bill or Mike didn't spill any unauthorized 
beans. Black, before Danny Wall took over as FHLBB chairman, was well known 
to Washington reporters for his good rapport with the press. However, once Wall 
became chairman that changed. Black reportedly wrote a memo to Wall criti- 
cizing the FHLBB's new Southwest Plan (Wall's much-ballyhooed answer to 
the S&L crisis in Texas that called for selling bankrupt thrifts), which was costing 
the FHLBB billions of dollars.^ Wall, according to former regulators, put Black 
on an informal muzzle, threatening to fire him if he criticized FHLBB policy 
again. Wall brought in the FBI as a consultant to help the agency keep a lid 
on information. He hired a security officer to track leaks. This Nixonian paranoia 
reached its peak when Wall's chief of staff recommended that the FHLBB offer 
a $20,000 reward for anyone who could turn in a leaker. (Wall decided against 
the plan.) Washington columnist Jack Anderson reported that the year after Wall 
took office he convened the FHLBB for only three public meetings but held at 
least 70 meetings behind closed doors. 

Such secrecy inevitably raised suspicions that the regulators had something 
to hide. We began to wonder why we never found a single instance where federal 
regulators had filed a criminal referral against one of their own examiners. Were 


we to believe that, while crooked thrift officials were busily bribing appraisers, 
accountants, and contractors, and receiving kickbacks and bribes themselves, 
not a single $14,000-a-year FHLB examiner ever took a bribe to cover up? 
Regulators said no, but we began to hear differently. One California examiner 
was quietly fired by the San Francisco FHLB after it was discovered he had 
received a $6,000 check from a crooked thrift officer. In Texas an officer of a 
failed thrift actually let a grand jury charge him with perjury rather than repeat 
to the jur\' what he had already told hvo different FBI agents three times in 
different interviews: Two days before he was subpoenaed to appear before the 
grand jury, an employee of the FSLIC whom he had known for years had called 
and told him to "get dumb" if it came to testifying before a federal grand jury. 
Still, not until 1989 did we find a single FHLB examiner or supenisor charged 
with wrongdoing. 

Then the facade began to crack. We learned that the FSLIC had hired Stuart 
Jones in Washington to help dispose of Texas S&L assets while he was reportedly 
being investigated by the FBI in Dallas for alleged criminal wrongdoing at 
Richardson Savings in Dallas, which had collapsed. Jones was a commercial 
loan officer at Richardson until he was fired in March 1986. The National 
Thrift News reported that the FHLB in Dallas had filed not one but two criminal 
referrals on Jones, both of which the FSLIC was blissfully unaware. 

A couple of weeks later the FBI arrested twin brothers Philip and Thomas 
Noons and charged them with defrauding the FSLIC while employed by the 
agency to help liquidate insolvent Mainland Savings in Houston. The men were 
charged with setting up a complex web of offshore banks to acquire assets of 
Mainland at below-market value. They pleaded not guilty and their trial was 
pending at press time. 

Then the FHLBB announced it had asked the Justice Department to in- 
vestigate charges that the former head of the FSLIC, Stuart Root, had given 
Silverado Savings in Denver (where Neil Bush had been a director) advance 
warning that regulators were going to seize the thrift in December 1988. Root 
denied the charges. 

These were all just allegations. No one had pleaded guilty or been convicted 
by a jury at this writing. But this cascade of allegations in early 1989 reinforced 
our own suspicions that all the confusion and sense of urgency surrounding the 
faltering thrift industry might become fertile ground for a second wave of thrift 
fraud, this time perpetrated by the very people sent to save the industry. 

Apparently we weren't alone in our concerns. In mid- 1 989 we learned the 
FBI had spent over $1 1,000 flying two suspected Texas thrift swindlers around 
the country. According to court testimony, the pair met with important elected 
and appointed officials in Washington under the guise that the hvo men wanted 
to acquire troubled Texas thrifts. The FBI wired them and recorded the con- 

The Touchables ■ 279 

versations. In all, 38 hours worth of body tapes were collected by the pair. While 
in Washington meeting with congressional aides, the pair met in June 1988 
with none other than FHLBB Chairman M. Danny Wall, a meeting they said 
had been arranged for them by Texas Senator Phil Gramm. Wall later confirmed 
the meeting. When the San Antonio Light ran a story that Wall was a subject 
of an FBI probe, the FHLB and the Justice Department vehemently denied 
Wall was a target. The tapes were put under court seal when the U.S. attorney 
argued that their release could jeopardize the probe. At press time precisely what 
that probe involved remained under wraps. 

Secrecy at the FHLBB succeeded for a long time in keeping the public from 
finding out that fraud was rampant at S&Ls. Occasionally someone on the inside 
would speak out, but that was rare. In January 1987 William Weld, assistant 
attorney general and head of the Justice Department's criminal division,' said 
in a speech to the American Bar Association: "... both FBI and [F'DIC] figures 
confirm that a large percentage of bank failures involve allegations of criminal 
misconduct on the part of the bank's senior management. . . . We have even 
got organized crime types taking a look at thinly capitalized financial institutions 
which are candidates for takeover, and then using (various specified fraudulent 
schemes] to create a paper financial asset which they can then pull the plug on 
after a year and a half or two, and leave the FDIC or FSLIC, i.e., the taxpayers, 
holding the bag. . . . Insider fraud thus obviously plays a major role in bank 
failures, and we now have evidence to suggest a nationwide scheme linking 
numerous failures of banks and savings and loan institutions throughout the 

Unfortunately Weld's words didn't get much attention (we didn't hear about 
them until 18 months later), and regulators continued to play the secrecy game. 
In late 1988 we called the San Francisco FHLB to ask about complaints we 
were still getting from FBI agents that they weren't receiving criminal referrals. 
A public relations person took our message and said she'd have an official call 
us back. Half an hour later she told us the official was "not comfortable talking 
to you about this." 

We did talk later, but only after we told the PR person that we already had 
the FBI side of the story and if the FHLB didn't want their side presented, we 
were "comfortable" with that. Then we were invited to a meeting with the Bank's 
criminal referral staff. At that meeting we were told that, indeed, the regulators 
had "fouled things up in the past" when it came to timely criminal referrals and 
providing information to the FBI. But since April 1988, they said, a new system 
was in place and the machinery was functioning much better. They, in turn, 
now criticized the Justice Department, saying that many cases referred to the 
FBI were not being prosecuted. Congress released the results of a confidential 
internal FBI audit that painted a bleak picture of the FBI's ability to investigate 


sophisticated financial crimes. Some federal prosecutors, the report said, were 
giving their bank fraud cases to IRS agents or Secret Senice agents to investigate, 
and some were going so far as to hire outside accountants to do the sleuthing. 

Criminal referrals remained the chafing point between the Justice Depart- 
ment and thrift regulators. But ci\il suits that the FSLIC filed against thrift 
abusers, to tr\ to reco\er some of the FSLIC's dwindling fund, were another 
important stumbling block in the complicated task of bringing criminal charges 
against thrift looters, though regulators would never admit it. When a thrift 
failed the FSLIC hired a high-powered private law firm to represent its interests 
against the thrift's former management and customers. Those attorneys were 
called "fee counsel" because the FSLIC paid them a fee for their services — a 
fat fee. In a short 18-month period between January 1986 and September 1987. 
the FSLIC reported it paid out a sta^ering $108 million in legal fees to inde- 
pendent fee counsel working on thrift failures nationwide (prompting one at- 
torney to suggest they rename the Garn-St Germain Act the Lawyer's Relief Act 
of 1982). 

Fee counsels' job was to figure out how the thrift's assets had disappeared 
and to go after them. They sued thrift officials who were guilty of self-dealing 
and borrowers who had defaulted on their loans. And they had no interest in 
seeing those people arrested because the accused might start squirreling their 
money away to pay for criminal attorneys and say they didn't have enough 
money to pay the civil judgment. Fee counsel complained further that when 
they filed a criminal referral, FBI agents flashed badges in the faces of their ci\il 
defendants, scaring them, and ever>one immediately clammed up. Defendants 
being deposed in a civil case would suddenly start taking the fifth amendment 
on the grounds that a criminal investigation was under way and anything they 
said in the civil action might be used against them in the criminal case. For 
these reasons many fee counsels just counted to ten whenever they were tempted 
to file a criminal referral and kept counting until the temptation went away. 
The issue became one of priorities: Was it more important to collect the missing 
money or punish the offenders?'' 

At the FHLB in Topeka we ran across a prime example of regulators' re- 
luctance to make criminal referrals to the FBI. After discovering what appeared 
to be fraud at SISCorp, an Oklahoma thrift servicing company heavily influenced 
by Charles Bazarian, attorneys met with Kermit Mowbray, president of the 
Topeka Federal Home Loan Bank, to advise him of their findings. A transcript 
of the meeting included the following exchange: 

"I can't minimize what I feel to be suspicions of criminality . . ."an attorney 
told Mowbray. But, apparently concerned about the conduct of pwssible civil 
proceedings, he quickly added, "I think if there was a stampede now by certain 
investigating agencies, I wonder if it wouldn't set off somewhat of a situation 
where people would become immobilized. 

The Touchables • 281 

"For example, if we called up the FBI . . . they're hot on white-collar crimes 
anyway. And that if the FBI was to hit the streets and investigating who knows 
... I wonder if it would help or harm in the short term . . . everybody retreating 
into a very defensive posture and not saying anything to anybody without four 
lawyers and a monsignor present." 

Mowbray replied, "I'm not sure that we need that. We usually do not call 
the FBI in until we have done our own investigation." 

"Well, that's fine," the lawyer replied, apparently satisfied that no ham- 
handed FBI agents would be muddying his civil waters. 

The end result of the strained relations between regulators and the Depart- 
ment of Justice was clearly visible in the numbers. Fven as late as 1987 (three 
years after the working group's formation) the San Diego division of the FBI 
would be working on only nine bank fraud investigations in the $100,000 to 
$250,000 category (a category large enough to exclude garden-variety embez- 
zlements). None of those investigations was referred by the FSLIC or the 
FDIC. Two were referred by the district attorney, two by an FBI informant, and 
two were started after agents learned of alleged bank fraud while reading the 
morning paper over coffee. The other three referrals also did not come from 

In Los Angeles in 1987 the federal prosecutor would receive 78 criminal 
referrals in cases involving losses between $100,000 and $250,000. None of those 
cases was referred by the FSLIC. Informants referred seven of the cases and 
seven more were initiated by the FBI on its own after it stumbled over information 
while investigating unrelated crimes. 

In eases where the loss exceeded $250,000 nine investigations were initiated 
in the San Diego division, and none of those was referred by the FSLIC. In 
Los Angeles 14? criminal referrals were filed in the $250,000-plus category, of 
which the FSLIC was responsible for only five. 

When regulators did make criminal referrals and forked over supporting 
documentation, the Justice Department often refused to keep them informed of 
the progress of the case (or to give them the information the FBI gathered that 
might help the P'SLIC locate some of its missing money) and prosecutions were 
uneven, depending entirely upon the individuals called upon to handle the case: 
the FBI agent, the U.S. attorney, the judge, and the jury. If an FBI agent 
pursued his suspects with vigor and collected all the necessary information to 
support an indictment, he then had to "sell" the case to an assistant U.S. attorney 
who would decide whether or not to prosecute the case. The system worked best 
when there was a team of an FBI agent and a U.S. attorney who were both 
dedicated to the prosecution of the ease, like U.S. Attorney Joe Cage and FBI 
Agent Ellis Blount in Louisiana (Herman Beebe) or U.S. Attorney Lance Cald- 
well and FBI Agent Joe Boyer (State Savings/Corvallis) in Oregon. But those 
were the rarest of exceptions. (In late 1988 a congressional report stated that 60 


cases in which the FBI in the Northern District of CaHfomia had completed its 
investigation had gone unproseciited.) 

Iftht U.S. attorney gave the go-ahead to prepare evidence for a grand jury, 
and (/the grand jury handed down indictments, the U.S. attorney had another 
chance to decide how much he believed in his case. Could he spare the long 
months it took to prepare for trial? And then the weeks in court? If the answer 
was no, the U.S. attorney would dispose of the defendants one by one by offering 
them relatively light sentences or even probation in exchange for a plea to one 
count of bank fraud. For the U.S. attorney's career scorecard a plea bargain 
counted as a conviction, just as if he had sent the crook up the river for 20 

But suppose the U.S. attorney decided to bite the bullet and take the case 
to court. Then he and the FBI agent faced the tedious work of building a case, 
and they nearly always did so by reinventing the wheel. The fraternity of high 
fliers and professional white-collar criminals who looted thrifts seldom confined 
their efforts to one financial institution. Yet FBI investigators rarely looked 
beyond the thrift in their jurisdiction. Time and again when we asked an FBI 
agent about a suspect we were investigating we discovered the agent had had no 
knowledge that the same person was under FBI investigation for bank fraud 
1,000 miles away. Crooks networked — FBI agents did not. In fact, we found 
that reporters like Byron Harris at WFAA-TV in Dallas and Pete Brewton at the 
Houston Post were far better informed about the network of major players in 
the thrift bust-out game than many FSLIC attorneys, U.S. attorneys, and FBI 
agents actually working the cases. 

Once FBI agents and the U.S. attorney had gathered their information and 
made a case, they had to endure the uncertainty of the outcome. Would a jury 
understand the complicated financial deals? Would they understand what a cash- 
for-trash deal was, what a land flip was, and how they were used to bilk a thrift? 
And if they got a jury to convict, would the judge hand down a sentence tougher 
than the prosecutor could have gotten if he'd just plea-bargained at the start? 
Every inch of the path, from discovery of the crime through prosecution, was 
littered with uncertainty. 

Judges and juries had a hard hme dealing with white-collar criminals. White- 
collar criminals didn't look like crooks — they looked like businessmen. In more 
than one instance we saw them con FBI agents, U.S. attorneys, judges, and 
juries. Swindlers are by definition likable folks. They'd be damned poor con 
men if they weren't. A few hours with a Charles Bazarian or a Mario Rcnda 
had most folks wondering why everyone was picking on them. All too often we 
saw people like Beverly Haines and Herman Beebe come before judges who 
could not bring themselves to view the defendants as serious criminals. Instead, 
they were treated like characters out of some Greek tragedy . . . victims of fate 
... in the wrong place at the wrong time . . . choosing the wrong fork in the 

The Touchables • 283 

road but otherwise fine fellows . . . when in fact they were criminals, plain and 
simple. They were swindlers who, when given the chance to make a decision 
between right and wrong, freely chose wrong. 

"These guys are con men," complained California Savings and Loan Com- 
missioner William Crawford during congressional testimony in 1987. "First they 
con the banker, then they con investigators, then they con prosecutors, and 
lastly they con the judge and the jury." 

The odds against the successful prosecution of a bank fraud case were enor- 
mous. The vast majority of looters would never .sec a day in jail or ever have to 
pay any restitution. Admitting the obvious. Attorney General Richard Thorn- 
burgh told Congress in early 1989, "We'd be fooling ourselves to think that any 
substantial portion of these assets is going to be recovered." 

Sometimes the obstacles came from within the Justice Department itself, as 
when then-Attorney General Ed Meese decided to transfer a million dollars to 
the department's obscenity unit from the travel budget of the Fraud Section just 
when it was beginning to make headway in its investigation of failed thrifts in 
Texas. (Meese was on his way out of office, having resigned after questions were 
raised about his ethical standards.) Suddenly prosecutors around the country 
were told there was no money to have witnesses flown in to testify before the 
grand jury and FBI agents were told they could not go to other states to conduct 
interviews because there wasn't enough money to pay the air fare. Then in 
October 1988 it was announced that, because of budget restraints, the Criminal 
Division at the Department of Justice had a hiring freeze in effect and U.S. 
attorneys would be cut back by 10 percent in 1989. By the end of 1988 there 
were still 128 vacant U.S. attorney positions that would apparently go unfilled. 
As regulators began referring more cases the understaffed Justice Department 
fell further behind in its investigations and prosecutions. In Chicago the U.S. 
attorney between 1985 and 1988 charged 300 people with embezzlement (250 
were convicted or pleaded guilty) and 120 cases involving losses of perhaps $100 
million were under investigation in December 1988. "Despite that," the U.S. 
attorney said, "the bank frauds continue to grow. " In 1989 Thornburg announced 
that one-third of the major bank fraud cases were not being pursued because 
the Justice Department lacked the resources. 

The only solution to this crunch was to filter the flood of fraud cases. U.S. 
attorneys' offices in areas like Los Angeles, San Diego, San Francisco, and 
Dallas simply established an arbitrary $100,000 cutoff point. If a case under 
$100,000 was reported to them, it generally went unprosecuted. In some juris- 
dictions a fraud had to exceed $250,000 before the U.S. attorney would even 
look at it. One U.S. attorney on the Organized Crime Strike Force told us, "I 
think sometimes that I could quit this job and go out and do bank scams. As 
long as I kept my take under $100,000 per scam I know I'd never get prosecuted." 
In Southern California and Texas, the cutoff became $1 million. 


The simple fact remained that whether the mob or just your generic swindler 
busted out a savings and loan (or bank), the risk he incurred was ver>' low but 
the potential for gain was staggeringly high. If a person was stupid enough to 
walk into a thrift and stick a gun in a teller's face, he would get out the door 
with a couple of thousand dollars at the most, have his picture taken in the 
process, get caught, and spend years in prison, where, for a handful of cigarettes, 
he'd become the personal property of the cellblock guerilla. But if he (or she) 
pulled a well-oiled loan scam, he would walk out the door arm in arm with the 
thrift president, with a check for a couple of million dollars in hand, if caught, 
and chances were excellent he would not be, and if convicted, and the odds 
were against it, he faced a very small chance of ever spending a day behind bars. 
The problem challenges us as a nation. For some reason our system has seen 
nothing unjust in slapping an 18-year-old inner-city kid with a 20-year prison 
sentence for robbing a bank of a couple of thousand dollars while putting a 
white-collar criminal away for just two years in a "prison camp" for stealing 
$200 million through fraud. 

The average sentence for an executive who defrauds an S&L and gets sen- 
tenced to prison is three years, compared to 13 years for someone who sticks up 
the same instituhon. Of the 960 jjeople convicted in federal courts of fraud 
against lending institutions in one year, only 494 were sentenced to prison terms; 
of 795 people convicted of embezzling, only 227 were sentenced to prison terms. 
But of 996 people convicted of robbing banks and S&Ls, 932 went to prison. 

Even the Justice Department's much-ballyhoocd task force of 50 federal law- 
enforcement officers who moved into Dallas in 1987 to investigate S&L fraud 
had failed to produce much results almost two years later. They had 25 con- 
victions, but most were for minor violations or were the result of plea agreements. 
About 25 percent of those sentenced got probation. Hampered by a lack of funds, 
most of the attorneys on the task force commuted from Washington to Dallas 
a couple of times a month while many defendants seemed to have huge financial 
resources and hired teams of high-powered attorneys to represent them. 

If Ed Gray hoped that furious prosecution of thrift crooks was going to help 
him chase the bandits out of the industry, he was destined for disappointment. 


Friends in High Places 

By 1986 the biggest issue facing Ed Gray in Washington became the growing 
insolvency of the FSLIC insurance fund itself All the new regulations and 
beefed-up regulatory staff would be for naught if the FSLIC lacked the money 
necessary to close and liquidate insolvent thrifts once they were identified. When 
a thrift was liquidated all its deposits up to $ 100,000 had to be repaid to depositors. 
That money came out of the FSLIC fund. A single medium-sized thrift liqui- 
dation could cost the FSLIC half a billion dollars,' and the fund was down to 
$2. 5 billion from $6 billion just two years earlier. Gray told Congress, as he 
had been doing for a year, that he needed the authority to raise at least another 
$15 billion, through bond sales, to cover the anticipated cost of closing all the 
rotten thrifts. 

In May, Gray sent to Congress a bill that he said would provide up to $25 bil- 
lion to deal with the FSLIC's problems. But tiie bill, dubbed the "recap" (short for 
FSLIC recapitalization), soon became the hottest political potato in town. At 
times it seemed to Gray that everyone was lining up against the bill. Legitimate 
thrift owners bristled at the notion that they should pick up the tab- for poorly run 
thrifts. They wanted the recap to be as small as possible, $5 billion at the most. 

One day, after a particularly grueling session before Congress, Gray ran into 
one of the U.S. League's chief lobbyists in the hall outside the hearing room. 

"Why are you guys fighting me on the recap?" Gray asked him. 

"Listen, Ed," the lobbyist answered, pulling Gray off to one side. "In 1989 
we'll have a new administration running things. By that time everyone will know 
this problem is so big that the industry can't pay for it. The taxpayer will have 
to pay for it then, not the industry." (The U.S. League did not speak for the 
entire industry. The smaller, and much less politically powerful. National Coun- 
cil of Savings Institutions supported immediate passage of Gray's recap bill.) 

The crooked thrift owners, on the other hand, wanted no recap at all. As 



far as they were concerned the best FSLIC was a broke FSLIC because it couldn't 
shut them down. That meant more time at the till and more time to gamble 
on hitting it big. 

The lobbying against the recap was furious, and the bill was going nowhere 
fast. Then once again, just when Gray's credibility was his most potent weapon, 
The Wall Street Journal ran a story that examined Grays cozy relationship with 
the U.S. League — which was curious since Gray had been fighting with them 
now for two years. The story examined the question of the League's "influence 
on Gray" and noted that the group had paid some of his travel expenses over 
the years. The Office of Government Ethics launched a probe to investigate 
whether the League regularly paid Gray's expenses when he traveled to speak at 
League functions.' A Washington Post reporter wrote that some of these stories 
originated with law firms Charles Keating, Jr., hired to leak reports that would 
embarrass and undermine Gray. 

It had all gotten to be too much. Soon after the story broke Gray's two board 
counterparts, Mary Grigsby and Don Hovde, announced they would be leaving. 
Gray knew he would not be allowed much of a hand in picking their successors, 
and he also believed Don Regan would seize the opportunitv' to insert two of 
the biggest thorns he could find. Those being named as possible candidates did 
little to reduce Gray's concerns. Ihere was conservative Democrat George Ben- 
ston, who had written a report just 15 months earlier for Charles Keating, Jr. 
Benston blamed high interest rates (that thrifts had to pay to attract deposits), 
not brokered deposits or direct investments, for the industry problems. Another 
possible choice was Durward Gurlee, Texas League lobbyist who had led the op- 
position to Gray in Texas. Then there was another Keating loyalist, Lee Hcnkel, a 
lawyer who resembled silent movie actor Fatty Arbucklc. Just a week earlier the 
National Thrift News had reported that Henkel-related businesses had received a 
number of large loans from Lincoln Savings, the thrift that Keating controlled. 

In November 1986 the White announced its choices for the two vacant 
seats. The Democratic seat on the Board went to Larry White, 43, an economist 
from New York University. White was young and bright and didn't seem to have 
ties to anyone in particular. Gray was surprised. He had been certain Don Regan 
would put someone in that scat to keep an eye on hini.^ 

The second seat went to Lee H. Henkel. Gray learned that Lincoln Savings 
had given Henkel a $250,000 personal loan and had loaned him more than $55 
million on real estate projects in Georgia. Henkel's law firm was also employed by 
Lincoln Savings. Keating and Henkel, it turned out, went way back together. 
They had reportedly met during John Connally's campaign for the presidency in 
1980, when Henkel was Connally's East Coast finance chairman and Keating was 
the West Coast chairman. The evidence tying Henkel to Keating was so over- 
whelming even the U.S. League was embarrassed by the mounting disclosures 
and the League came out against his appointment to the Board. 

Friends in High Places ■ 287 

Gray suspected that since Keating Had failed to liire liini away from the 
FHLBB, he was now trying to put his own man on the Board to neuter him. 
Henkel's first move did httle to change Gray's theory. Henkel no sooner took 
his scat than he introduced a new regulation tliat would grant a sweeping clem- 
ency to thrifts that had violated Gray's tough direct investment regulation and 
would allow them to keep the investments they had made before the regulation 
went into effect. Among the thrifts that would have benefited from Henkel's 
regulation was Lincoln. 

A federal ethics inveshgator had reviewed Henkel's background, and Henkel 
told the investigator he had repaid the personal loan from Lincoln Savings and 
had put all his Lincoln-financed real estate projects into a blind trust. The 
reviewer had ruled that Henkel's relationship with Keating posed no ethics prob- 
lems. However, Senator William Proxmire, the 66-year-old Democrat from 
Wisconsin and chairman of the Senate Banking Committee, made it known 
that he had major reservations about the Henkel appointment. It had been made 
by the president during the winter recess and until now the Senate had not had 
time to study or comment on it.' Proxmire reportedly felt Henkel might be unfit 
to serve as a FHLBB member because of the potential conflict of interest caused 
by the loans he'd received from Lincoln Savings. The senator had also supported 
Gray's direct investment regulation and strongly opposed Henkel's new proposal 
to amend it. Proxmire announced he'd hold hearings on the Henkel matter. 
With Proxmire on Henkel's trail, it didn't appear to Gray that Henkel would be 
a board member very long. 

Gray's priority at that juncture was to get the recap bill away from Jim 
Wright, who was holding it hostage as a favor to his Texas thrift constituents. 
The FSLIG insurance fund didn't have enough money to bail out a few small 
thrifts with the flu, much less the estimated 400 thrifts that were now functionally 
insolvent and just hadn't been so declared. (Regulators coined the phrase "brain 
dead" to describe thrifts that regulators were allowing to operate after they became 
insolvent simply because there wasn't enough money in the FSLIG fund to close 
them and pay off depositors.) The recap had to be passed and fast. Gray's best 
estimate was that brain-dead thrifts were experiencing operating losses totaling 
$10 million a day. 

For months Gray fenced with Jim Wright over the recap. '' Time after time 
Wright took Gray to the woodshed for his Texas thrift and developer constituents. 

In January 1987 Wright was elevated to speaker of the House. In February 
Gray had an aide call Wright to see if the bill would .soon be sent to the floor 
for debate. Gray's aide also told the speaker's office that if they needed any 
information that would be helpful in moving the recap bill along, please call 
and Mr. Gray would go right over. Gray's aide made several such offers in the 
days that followed, but Wright's office didn't return any of the calls. At one point. 
Gray told us later, his office called Wright every 1 5 minutes for a solid week. At 

288 • INSIDE )OB 

the end of that week (late Februan') a spokesman for Wright finally returned the 
call. Grav was out, so he left a message: "Don't call us. We'll call you." 

Later Gray would recall those hectic days with bitterness. "1 have worked 
with all kinds of guys in government since 1966. I've seen people who were 
honest and straightforward and those who were something else, but I never saw 
anything like this. The speaker used his power and influence to bring about 
behavioral changes in a regulator. It was an abuse of power and improper. I felt 
he was putting us through hoops to do his bidding. I v\ish I had told him off, 
but when you have no money left in your fund you do things you would normally 
never do. I certainly would not have done what I did, unless I felt it was the 
only way to get the recap bill passed." 

Wright's chief of staff would later (1988) send the following mind-boggling 
rationalization to Banker's Monthly.' 

One of the first hints of serious troubles in America's S&Ls came to then- 
Majority Leader Wright in 1986. Into his office one day came a young 
woman whose husband had lost his job six months earlier. Even though the 
family had been making timely payments for eight years and was, in fact, 
only two months in arrears, their home was being repossessd. 

Looking into the matter, Wright found that this case, like many he would 
see later, was the result of a federal regulator's arbitrarily dictating policy to 
a savings institution under federal super\'ision. The regulator had ordered 
the lender to foreclose on all due mortgages — no delays, no forbearances, 
no ifs, no ands, no buts. In this case and several others Wright was able to 
help the young couple sa\e their home. They were allowed to work out an 
arrangement to get their house payments current once more. 

That, after all. is the job of a Congressman. There is nothing unusual or 
sinister about a citizen coming to a member of Congress for help. In each 
mail Speaker Wright receives a stack of letters from people caught in the 
web of an impersonal bureaucracy and appealing for help. In every congres- 
sional office it is the same. 

TTiis is what makes America the great country that it is. If government should 
ever become so remote and so aloof that the plain, everyday citizen has no 
influence, no access and no intercessor, then we will have lost our precious 
Constitutional right "to petition the government for a redress of grie\ ances. " 

The fact remained, however, that Wright intervened, not on behalf of some 
poor woman whose husband had lost his job, but on behalf of big campaign 
contributors who had lost (or were about to lose) their savings and loans, men 
like Tom Gaubert, Don Dixon, and Craig Hall. Hall had had half a billion 
dollars in troubled debt at thrifts when Wright exerted pressure on Gray to get 
Hall some forbearance. 


Friends in High Places • 289 

By the end of Fcbruiiry the burgeoning savings and loan erisis was making 
news. Washington reporters began asking Speaker W'riglit daily about the recap 
bill and why it wasn't moving. The break in the impasse came on April 27, 
1987. when the FSLIC filed a civil lawsuit seeking $S40 million in damages 
from Dixon and six other former Vernon officers, the largest such claim the 
agency had ever filed. The next day Wright announced he would support the 
$15 billion version (Gra\'s current version) of the FSLIC recap bill. But he 
continued to p)eddle influence for his I'exas thrift constituents and was eventually 
successful in getting a forbearance provision added to the recap bill, a provision 
that instructed regulators to grant forbearance to thrifts whose problems were 
determined to have been caused by temporary economic conditions. Gray blasted 
the forbearance provision, sa\iiig it would hamstring regulators.'' 

In May, after intense lobbying by the U.S. League for a smaller $5 billion 
recap bill, the House passed a $5 billion recapitalization plan'' and the Senate 
passed a $7. 5 billion version. A conference committee began the process of 
reconciling the two versions of the bill. 

Two months before the end of Gray's term, which was scheduled to expire 
in June 1987, things finally started to break his way. His old nemesis at the 
White House, Don Regan, ran into a buzz saw named Nancy Reagan and was 
sent packing. '" Though no one could have imagined it earlier. Gray had actually 
outlasted Regan. To sweeten Gray's victory Regan had learned that he was 
"retiring" while watching a morning news program, after which he submitted 
his resignation in a huff. Those who lived by the news leak sometimes died by 
the news leak. It was a sweet moment for Ed Gray, whose friends broke out a 
bottle of champagne for a small impromptu office party. 

Just a week later pressure from Senator Proxmire and rumors that the Justice 
Department might probe his relationship with Charles Keating forced Lee Henkel 
to resign his seat on the FHLBB, saying he was "fed up with the whole process" 
of defending himself against conflict-of-interest charges concerning Lincoln Sav- 
ings. Gray thought he just might be able to leave Washington with some scalps 
of his own under his belt. 

And there was more good news: No action would be taken against Gray for 
using expense money from the district banks for his travel expenses. The GAO 
and the Department of Justice had conducted an investigation of charges that 
he had traveled on FHLBB business and billed his expenses to district banks and 
that he had used expense money for golf and yacht outings. Gray had written 
a letter to Congress apologizing for his "flawed judgment" and had repaid the 
district banks $28,000. ln\estigators reported that using district bank money for 
FHLBB expenses would not be tolerated in the future and henceforth could 
result in criminal charges, but Gray would not be indicted. 


Early in April, a couple of days after Henkel resigned. Senator Dennis 
DeConcini (D-Ariz.) called. "Ed, can you drop by my office?" he asked. 

When Gray arrived at DeConcini's office the senator met him at the door. 
Grav had walked into another ambush. Waiting in DeConcini's office were three 
more senators; John McCain (R-Ariz.), John Glenn (D-Ohio), and Alan Cran- 
ston (D-Calif.). The four men had something in common besides being United 
States senators — campaign disclosure forms showed they each had received 
healthy political donations from Charlie Keating and his associates. Of the 
contributions Keating and his associates had made since 1984, these four men 
or their associates had received: DeConcini, $55,000; McCain, $112,000; 
Glenn, $200,000; Cranston, $889,000. Each man claimed Keating as his per- 
sonal constituent because Lincoln Savings was based in Irvine, California, and 
American Continental Corporation, Lincoln's parent company, had been in- 
corporated in Ohio and had its headquarters in Phoenix, Arizona. 

Suddenly Gra\ felt tired. With only weeks to go as chairman, he was in no 
mood for this. In the four years since he'd taken office his hair had thinned 
noticeably. His middle-age spread hung over the belt of his trousers. In the early 
days as chairman. Gray, with his silver hair and boyish smile, had looked 
distinguished, though often tired. Now he looked haggard, like a boxer who'd 
taken too many punches. 

The four senators wanted to know wh) the examiners from the Eleventh 
District FHLB in San Francisco were being so tough on Charlie Keating. The 
FHLB wanted Lincoln in line with Gray's new direct investment regulation, 
but Keating claimed that the new regulations were the equivalent of changing 
the rules in the middle of the game and should not be retroactively applied to 
thrifts that had operated under the old rules. (Keating had filed suit in federal 
court challenging Gray's regulation. The case was later dismissed.) 

DeConcini took the lead: "Look, this is what we'll do. We agree with the 
idea that Lincoln not making more home loans is bad. That's what they're 
supposed to do." (Prior to Keating's acquisition of Lincoln in 1984. the thrift 
had been a heavy single-family mortgage lender. But in 1985 Lincoln originated 
only 1 1 mortgages and four were for employees. For a $3.6 billion S&L with 
24 branches that was unusual behavior.) 

"What do you want?" Gray asked. 

DeConcini offered a deal: "We'll assure you that they'll make more home 
loans and get into the basic business of home lending if you do something — 
you have to withdraw the equity -risk regulations." (Equity-risk regulations re- 
quired thrifts that were heavily involved in direct investments to set aside ad- 
ditional cash reserves to compensate for the risk inherent in those investments.) 

Gray was puzzled. He had four U.S. senators trying to negotiate business 
with him on behalf of a .savings and loan. Gray reminded them that Lincoln 
was suing the FHLBB over the direct investment regulation. He also offered his 

Friends in High Places • 291 

opinion tliat it was highly irregular for hini, as FULBB chairman, to be asked 
to discuss a savings and loan that was presently being examined by a FULB." 
Gray told them it would be impossible for him to withdraw the direct investment 

DeConcini made one last try. He suggested that the regulation be withdrawn 
until a court coidd determine if the rule were legal or not. 

"If 1 withdraw it," Gray told him, "then they'll just withdraw their suit." 
He reiterated. '"I'he rule is very important." 

Gray told the senators if they had any more questions about Lincoln to direct 
them to Jim Girona, president of the Eleventh District FHLB in San Francisco. 
Supervision had been transferred to the district banks, and the Eleventh District 
was responsible for whatever examinations were in progress at Lincoln. 

A few days later DeConcini called Girona and asked if he and his staff could 
come to Washington to discuss "the Lincoln problem. " A meeting was scheduled 
at DcGoncini's office for April 9 at 6 p.m. 

Girona flew to Washington along with his second-in-command at the San 
Francisco FHLB, Michael Patriarca, and Richard Sanchez, the supervisor in 
charge of Lincoln's examination. In Washington they picked up Bill Black over 
at the FSLIG. He was transferring out to San Francisco soon to be the general 
counsel at the San Francisco FHLB. 

When the four arrived at DeGoncini's office they found senators DeGoncini 
and McGain in attendance. Senator Glenn arrived a few minutes late and Senator 
Granston dropped by briefly. Also present was Senator Don Riegle (D-Mich.), 
next in line to replace Proxmire as chairman of the Senate Banking Gommittee. 
Riegle, like the other senators there that day, had received large donations from 
Gharles Keating and his associates ($76, 100 in Riegle's case). Keating had raised 
the money for Riegle in March at a fund-raiser attended by over 100 Keating 

The meeting lasted just over two hours. All four regulators and four of the 
five senators stayed the entire time. Granston, who had appointments to keep 
on the Senate floor, stopped by to tell Girona, "I just want to say that I share 
the concerns of the other senators on this subject. " The meeting was confidential. 
Bill Black was the only person taking detailed notes, which became an unofficial 
transcript of the meeting prepared at Ed Gray's request, and the basis for the 
following. (The entire, uncut transcript is reproduced in Appendix B. ) 

Jim Girona began the meeting by introducing his colleagues from the district 
bank. After the introductions DeGoncini got right to the point. He told the 
regulators, "We wanted to meet with you because we have determined that 
potential actions of yours could injure a constituent." The constituent, of course, 
was Lincoln Savings. 

DeGoncini said that Keating was afraid the FHLB was going to seize Lincoln 
because Keating disagreed with the Bank Board's rules on direct investments. He 

292 ■ INSIDE )OB 

said Lincoln also strongly disagreed with the Bank Board over appraisals it had 
made on Lincoln properties. They were low, way too low, and "grossly unfair." 

Senator McCain, from Tempe, Arizona, spoke up to try to put the meeting 
into a more benign light. "ACC [American Continental Corporation, head- 
quartered in Arizona, was Lincoln Savings' parent company] is a big employer 
and important to the local economy. I wouldn't want any special favors for 
them. ... I don't want any part of our conversation to be improper. We asked 
Chairman Gray about that and he said it wasn't improper to discuss Lincoln." 

Senator John Glenn jumped in to complain that the district bank had taken 
an "unusually adversary view toward Lincoln." He complained that normal 
examinations took up to six months, but the Lincoln exam had dragged on and 
on. "To be blunt, you should charge them or get off their backs," Glenn said. 

Riegle said the way it looked to him was that the standoff between Lincoln 
Savings and the FHLBB had become a "struggle between Keating and Gray. . . . 
The appearance is that it's a fight to the death." Riegle added that he just wanted 
to make sure the San Francisco regulators were acting in a fair and professional 

Cirona finally spoke up. Contrarv' to rumor, he told the senators, Ed Gray 
was not out to get Charles Keating. "We [at the San Francisco FHLB] determine 
how examinations are conducted," he told them. "Gray never gave me instruc- 
tions on how to conduct this exam or any other exam. At this meeting you'll 
hear things that Gray doesn't know." 

Cirona then put the senators on notice. "This meeting is very unusual, to 
discuss a particular company." 

"It's very unusual for us to have a company that could be put out of business 
by its regulators," DeConcini shot back. "Richard [Sanchez], you're on, you 
have 10 to 12 minutes." (The senators had a vote coming up on the floor.) 

Sanchez began presenting the Bank Board's case. "An appraisal is an im- 
portant part of underwriting [a loan]. It is very important. If you don't do it right 
you expose yourself to loss. Our 1984 examination [of Lincoln] showed significant 
appraisal deficiencies. Mr. Keating promised to correct the problem. Our 1986 
exam showed the problems had not been corrected, that there were huge appraisal 
problems. There was no meaningful undenvriting on most loans. " Sanchez cited 
as an example an appraisal redone for the FHLB by Merrill Lynch that corrob- 
orated a "significant loss." 

DeConcini countered Sanchez. "Why not get an indejjendent appraiser?" 

"We did," Sanchez answered. (The FHLB had hired Merrill Lynch to do 
the appraisals.) 

"No, you hired them," DeConcini replied. "Why not get a truly independent 
one or use arbitration if you're trying to bend over backwards to be fair?" (De- 
Concini didn't specify how the FHLB might go about getting a "truly independent 
appraiser " without hiring one.) The senators broke for a vote on the floor. 


Friends in High Places ■ 293 

When tlic meeting resumed Sanchez told the senators, "Lincoln had un- 
denvriting problems with all their investments, et|uity securities, debt securities, 
land loans, and direct real estate investments." He said that out of 52 real estate 
loans Lincoln made between 1984 and 1986 there were no credit reports in the 
file on the borrowers in all S2 cases. Examiners found $47 million in loans 
made to borrowers who didn't have adequate credit to a.ssurc repayment. 

"They're flying blind on all their different loans and investments," Patriarca 
told them. 

Glenn asked, "Some people don't do the kind of underwriting you want. 
[But] is their judgment good?" 

Patriarca replied, "That approach might be okay if they were doing it with 
their own money. They aren't. They're using federally insured deposits." 

Riegle piped up. "Where's the smoking gun? Where are the losses?" 
I "What's wrong with this if they're willing to clean up tiieir act?" added 

Cirona couldn't believe the resistance. "This is a ticking time bomb," he 
told them. 
! Patriarca's patience had worn thin. "I've never seen any bank or S&L that's 
i anything like this," he told the senators. ". . . They [Lincoln's practices] violate 
the law and regulations and common sense." 

Then he dropped his bombshell. "We're sending a criminal referral to the 
Department of Justice. Not maybe, we're sending one. '- This is an extraordinarily 
serious matter. It involves a whole range of imprudent actions. I can't tell you 
strongly enough how serious this is. This is not a profitable institution. . . . Let 
me give you one example. Lincoln sold a loan with recourse [the buyer had the 
right to back out] and booked a $12 million profit. The purchaser rescinded the 
I sale, but Lincoln left the $12 million profit on its books. Now, I don't care how 
many accountants they get to say that's right, it's wrong." 

Still fighting, DeConcini countered, "Why would [the accountants] say these 
things [that the regulators' exam was inordinately long and bordered on harass- 
ment]? They have to guard their credibility too." 

"They have a client," answered Patriarca, referring to the fact that thrifts 
pay the accounting firms to perform the required annual audits. 

"You believe they [private accounting firms] would prostitute themselves for 
a client? ' DeConcini asked. 

"Absolutely," said Patriarca. "It happens all the time." 

The senators left for another vote, then returned. 

After some discussion Sanchez said, ". . . [Lincoln has] $103 million in 
goodwill" on their books. If this were backed out, they would be $78 million 

"They would be taken over by the regulators if they were a bank," added 


Cirona told DeConcini that the regulators had tried to compromise with 
Keating. "I've never seen such cantankerous behavior," Cirona said. "At one 
point they said our examiners couldn't get any association documents unless 
they made the request through Lincoln's New York litigation counsel." 

Patriarca's comment that he was filing a criminal referral on Keating must 
have been still ringing in the senators' ears. They began to soften their opposition. 
DeConcini, although still unhappy with the way the FHLB was appraising Lin- 
coln's projDerties, nevertheless commented, "Frankly the criminality surprises ) 

"What can we say to Lincoln?" a stone-faced Glenn asked. 

"Nothing with regard to the criminal referral," Black said. ". . . Justice 
would skin us alive if |they knew we had discussed it]." 

Patriarca ended the meeting by telling the senators, "I think my colleague 
Mr. Black put it right when he said that it's like these guys put it all on 16 black 
in roulette. Maybe they'll win, but I can guarantee you that if an institution ; 
continues such behavior it will eventually go bankrupt." Nine months after this I 
meeting the National Thrift News acquired a copy of Black's secret transcript 
and broke the story. Shortly thereafter Don Riegle returned the $76,100 in 
donations to Charles Keating and his friends, stating that he wanted to avoid 
any appearance of misconduct. 

Lincoln Savings' attorney commented on the allegations of impropriety' raised 
at the meeting: "From what you've told me these are malicious statements based 
on false information." 

In January 1989 Senator Riegle, now in Proxmire's old post as chairman of 
the Senate Banking Committee, appeared on Meet the Press and flatly denied 
he'd ever interceded on behalf of Lincoln. 

"I did not intervene on behalf of a company [Lincoln]. I did attend a meeting 
at the request of other senators who represented the state in which that institution 
was. I came as a member of the banking committee to help try to understand 
the maze of regularion that is obviously very complex. But 1 took no action on 
behalf of that savings and loan or any other at any time." 

A year after the meering between the five senators and San Francisco FHLB 
representatives, Keating and the San Francisco district bank were still fighting. > 
The president of the district bank, Jim Cirona, later told a congressional com-i 
mittee that Lincoln Savings had given regulators in Washington a secret file 
about him. 

"He [Roger Martin, an FHLBB member] told me that he had in his possession 
information that was furnished to him by Lincoln that would be very damaging! 
to me." 

When asked by reporters about the file, Martin at first denied its existence. '■ 
Then he recanted and said he had indeed had such a file given to him by Lincoln . 

Friends in High Places ■ 295 

Savings but he had not looked inside it. He said, though, that it was his impression 
that the file contained notliing of a personal nature, only more complaints about 
the manner in which the San Francisco regulators were conducting their long 
examination of Lincoln. 

San Francisco regulators completed that examination in May 1987. They 
reported what they considered to be substantia! irregularities at Lincoln and they 
recommended seizure of the institution. But Danny Wall became chairman of 
the FflLBB in June, and Keating complained to him that the regulators at the 
San Francisco FHLB were out to get him. He said they had leaked confidential 
material to the press to undermine him and his company. Wall prohibited the 
San Francisco regulators from moving against Lincoln, histead, he moved the 
responsibiiih' for Lincoln's examination and supervision from the San Francisco 

, FHLB to the FHLBB in Washington — something that had never occurred in 

■: the 50 years of Bank Board history. San Francisco regulators complained that 
Wall's action had "crippled" the independence of his examination staff and 

i "undercut every regulator in the country." 

i When Keating was asked if his financial support influenced politicians to 
support his cause, the Orange County Register reported that he told reporters, 
"I want to say in the most forceful way 1 can: I certainly hope so." 

in November 1987 the FHLBB in Washington initiated its own examination 
of Lincoln Savings, which would last for over a year. In 1988 a meeting was held 
at the White House with select members of the White staff and a handful of 
Republican congressmen. One of those attending that meeting said he was as- 
tounded to hear a close advisor to the president conclude that the best cure for the 
thrift industry was to "keep moving in the direction of the Charles Keatings. 
They're the only hope." Keating, however, had different ideas. He decided he 

I didn't want to be in the thrift business anymore and put Lincoln up for sale. 

Finally even the folks in Washington could not ignore conditions at Lincoln. 
The FHLBB completed its examination at the end of 1988 and soon demanded 
that Keating relinquish control of Lincoln. He responded by throwing Lincoln's 
parent company, American Continental, into bankruptcy on April 13, 1989, and 
regulators moved in to seize Lincoln the following day. Keating promptly called a 
jdramatic televised news conference in Phoenix and, visibly upset, hands shaking, he 
told the citizens of Arizona that their economy would be destroyed if regulators — 
whom he described as malicious, politically motivated bureaucrats — brought 
Lincoln down (American Continental claimed to employ 2,300 Arizonans). 

The same day Danny Wall was forced to admit that San Francisco regulators 
had been right about Lincoln, and he confirmed that the Bank Board had made 
several referrals to the Justice Department involving Lincoln Savings. He said 
;he Bank Board audit had uncovered evidence of assets being shifted from Lincoln 
Savings to American Continental and documents being destroyed. 

Two weeks later the Orange County Register reported that it obtained a copy 


of an FHLBB memo that reportedly accused American Continental of "cooking 
the books" to make both it and Lincoln Savings appear healthy and of making 
deals with insiders and affiliated companies that cost Lincoln Sa\ ings more than 
$100 million. 

Company spokesman Mark Connally responded. "1 don't put a whole lot of 
stock in anything the Bank Board says. All it is is a lot of hot air and unfortunate 
innuendo." As of this writing, Keating was threatening "to challenge in court 
those who would destroy us, and [to] call for a full federal investigation of the , 
abusive power by one or more regulator offices." 

Regulators said the collapse of Lincoln Savings would cost $2.5 billion. 

In )une 1987 Ed Gray cleaned out his desk at 1700 G Street to make j 
room for the new chairman, M. Danny Wall — the same Danny Wall who I 
in 1982 had helped shape much of what became known as the Garn-St Gemiain 
Act when he was staff director of the Senate Banking Committee, and the | 
same Danny Wall who had opposed Gray's brokered deposit regulation. 
Treasury Secretary James Baker called Jim Wright in Fort Worth to give him 
the good news.''' Wall had come to Washington with Senator Jake Garn (R- 
Utah), chairman of the Senate Banking Committee, from a savings and loan I 
in Salt Lake City and had ser\ed as Garn's chief administrative aide. Bald, j 
bearded, energetic, and always impeccably dressed in three-piece suits. Wall! 
was more in tune than Gray with the U.S. League: The New Republic reported 
that a journalist examining the disclosure statements of top congressional staffers 
a few years earlier had discovered that Wall led the pack in lobbyist-subsidized . 
junkets — 30 in one year. Wall was obsessed with making certain no unauthorized j 
documents leaked to the press. And he stressed the positive side of the S&'L 
industry. Over and over he repeated how pleased he was to head an industry in 
which "80 to 90 percent of the thrifts were healthy and thriving." He said it was 
only a small minority of thrifts that were in trouble and he'd have a handle on 
them just as soon as the recap bill passed the Senate (which it finali\ did in 

Wall vehemently denied charges that he was systematicalK misinforming 
Congress and the American public about the depth of the FSLIC problem when 
he projected a $20 billion FSLIC deficit at the same time the General Accounting 
Office was estimating the debt to be more like $70 billion and private forecasts 
were coming in at over $100 billion. But after George Bush's nomination speech 
at the Republican National Convention, Americans might have wondered how 
Bush's "read my lips, no new taxes" and FSLIC's huge debt could coexist," so 
mum was the word. By 1989, however, Wall's sleight of hand with the S&Li 
numbers had become so outrageous that House Banking Committee Chairman i 
Henry Gonzalez called loudly for Wall to be fired. It was hard to argue with 

Friends in High Places ■ 297 

Gonzalez's reasoning: Anybody who couldn't figure out how bad the problem 
was shouldn't be in charge of fixing it. 

As for Kd Gray, he was glad his term was over. He knew only too well that 
80 to 90 percent of the industry was nowhere near "healthy and thriving." Gray 
knew he was still being vilified by almost everyone touched by the scandal. 
Federal Reserve Board Chairman Paul Volcker and Treasury Under Secretary 
George Gould were two of his few supporters. To the high fliers in Texas and 
California, Gray was still the Darth Vader of the Bank Board. To the U.S. 
League he was an unpredictable public relations nightmare and a loose cannon 
on their deck. To congressmen and senators he was the guy who had caused 
them to be reminded that money had strings and their mouths moved when 
someone pulled those strings. Almost everyone was glad to hear that Ed Gray 
was cleaning out his desk. 

Perhaps it was a tragedy that someone of greater national stature had not been 
chairman at this critical time, someone like Gray's friend Volcker, who could 
have gone to Congress and thrown down the gauntlet. It's difficult to imagine Jim 
Wright treating Volcker the way he routinely mistreated Ed Gray. But whatever 
Gray lacked in stature, he more than made up for in personal commitment. 
When he left Washington he left with bitter memories of a president and admin- 
istration that had turned their backs on him when he most needed support. He 
also left in debt, while the crooks he had tried to chase out of the industry had 
stuffed offshore bank accounts with hundreds of millions of ill-gotten dollars. 

The movie The Untouchables opened in Washington the last week before 
Gray's departure, and Gray rushed to see it. It was about FBI Agent Elliot Ness's 
battles against mobster Al Capone and his bootleggers, and it struck a chord with 
Gray. Being under attack from every side for over four years left him feeling like 
Ness — one man, alone against the corruption of an entire system. The next day 
Gray had scheduled exit interviews with the major newspapers, and he invoked 
the name of Elliot Ness, comparing himself to the crime-fighting loner. Only 
one newspaper. The American Banker, mentioned Gray's embellishment. 

Gray never got to see Congress pass the recap. Two months after he left 
office reconciliation between the House and Senate versions was completed and 
the bill — which gave the FSLIC $10.8 billion in borrowing authority — was 
signed into law in August 1987. Two precious years had been wasted in political 
wrangling since Gray had first begun his campaign to get more money for the 
FSLIC so that insolvent thrifts could be closed and a permanent stop put to 
their hemorrhage of red ink — two years at $10 million dollars a day in additional 
losses. (By August 1987 some analysts felt this figure was too low. At the end 
of 1988 analysts said the insolvent thrifts were costing the FSLIC $35 million 
a day.) But Ed Gray's ordeal was over. Danny Wall had the wheel now, and 
his job would be to keep a lid on the problem until the Reagans got out of town 
in 1989. Once again political expediency would win out over statesmanship. 


What Happened? 

We set out in 1986 with a simple question: How had thrift deregulation gone 
so terribly wrong? To find the answer we decided to take a look at a fev\ dozen 
failed savings and loans that we selected virtually at random, attempting only to 
obtain a fair geographic sampling. Three years later we had our answer: A 
financial mafia of swindlers, mobsters, greedy S&L executives, and con men 
capitalized on regulatory weaknesses created by deregulation and thoroughly 
fleeced the thrift industry. While it was certainly true that economic factors (like 
plummeting oil prices in Texas and surrounding states) contributed to the crisis, 
savings and loans would not be in the mess they are today but for rampant fraud. ' 

Yet to this day diehard apologists for thrift deregulation flatly refuse to admit 
that purposeful fraud was, in fact, chiefly to blame for the FSLIC's $200 to $300 
billion debt. A few stubbornly adhere to their denials because they still don't 
realize what was going on around the countr\-, but most — especially members 
of lobbying groups like the U.S. League — are simply trying to cover up their 
own culpability. They pushed hard for deregulation and fliey share responsibility 
for the results. 

Even the part of the industry that did not participate in the orgy of avarice 
and fraud must share some degree of blame. They knew what was going on but 
they kept their silence, fearing that Congress would re-regulate the industry if 
legislators found out what rogue thrifts were up to. 

As Edmund Burke said, "The only thing necessary for the triumph of evil 
is for good men to do nothing." Fraud became the thrift industry's dirt)' little 
family secret. 

When Ed Gray tried to clamp down on renegade thrifts, the industry and I 
Congress fought his everv' move. Like rebellious teenagers bristling over parental '■ 
intrusion, thrift lobbyists and many thrift executives complained bitterly that 
Gray was cramping their style, that he didn't understand them, that he was old- 


What Happened? ■ 299 

fashioned. Congress, always sensitive to the complaints of large contributors, 
listened well. In the end too many politicians became net beneficiaries of the 
fraud that swept the thrift industry. WFAA-TV in Dallas reported, for example, 
I that in 1987-88 the three largest S&L political action committees gave more 
'than $88^,000 to candidates for Congress. As a result, just when the country 
needed the best regulators money could buy, those regulators were stopped cold 
in their tracks by .some of the best politicians money had bought. 

These powerful forces easily outmaneuvered F.d Cray and systematically 
undercut his effectiveness. From the very beginning of our investigation we were 
told that Gray had bungled the job, that he was "an idiot, a buffoon." People 
like lohn Lapaglia, Charles Bazarian, Charlie Knapp, and Tom Caubcrt railed 
about Cray and his misguided policies, blaming him for virtually the entire thrift 

"if your book comes off sympathetic to Cray," Lapaglia warned us, "you'll 
be the laughingstock of the industry." 

But wc spent many hours interviewing Ed Cray and people who worked 
with him during those critical years, and we came away with a different opinion. 
It was true that nothing Cray had done in his life had in any way prepared him 
for handling a crisis of this magnitude and complexity. He was a public relations 
man by trade. Still, even with some of the most powerful forces in government 
breathing fire down his back, he didn't fold and he didn't run away. Instead he 
took highly unpopular positions that he believed were right and necessary and 
he stuck with them. He was one of the first to correctly assess the magnitude of 
the problem and react accordingly. 

I Ed Cray's biggest fault was that he didn't go public when it became clear 
■ that a cabal of political and industry forces were conspiring against his remedial 
efforts. He should have blown the whistle on them and blown it loud. He should 
have named names. He should have turned the spotlight on what seems to us 
to have been sleazy legislative extortion by Jim Wright and others. ' He should 
I have held a press conference and exposed the OMB's refusal to give him more 
examiners. But Cray believed that common sense would eventually overcome 
partisan self-interest. He was wrong. 

If those who authored thrift deregulation didn't see the potential for fraud, 
others certainly did. The likes of Mario Renda and Mike Rapp and Charles 
Bazarian were swinging into action even before the Carn-St Cermain bill was 
signed. Renda actually followed the progress of the bill through Congress, making 
i notes in his daily desk diary. And when Carn-St Cermain passed, Renda and 
the others moved in like Cerman tank divisions in the early days of World War 
II, grabbing territory virtually unopposed. Instead of acting to stop the looting. 
Congress and regulators debated over whether they should do anything. They 


couldn't even seem to decide if the people looting thrifts were crooks or just 
misunderstood "entrepreneurs. " 

Such a chaotic state of affairs was fertile ground for the mob. And for them 
thrift deregulation could not have come at a better time, because the justice and 
Labor departments had just cracked down on the mob's pipeline to the Teamsters' 
Central States Pension Fund, which had for so long been a ready reservoir of 
capital for wise guys who didn't mind paying kickbacks. The 1986 President's 
Commission on Organized Crime reported that Jimmy Hoffa, who became 
Teamster president in 1957, was indisputably a direct instrument of organized 
crime, and his control over the Central States Pension Fund was convenient for 
wise guys who couldn't get loans elsewhere. In the mid-1970s, for example, 89 
percent of the fund's investments were in real estate loans, mostly to small, 
speculative businesses (such a portfolio was highly unusual for such a large fund, 
analysts said). "In short," wrote author Steven Brill (The Teamsters), "the mob 
had control of one of the nation's major financial institutions and one of the ' 
very largest private sources of real-estate investment capital in the world." 

The president's commission revealed that Hoffa shared his pension-fund 
kickbacks with Allen Dorfman, asset manager and consultant to the Central 
States Pension Fund, and one of their favorite investments for jsension-fund 
money was Las Vegas real estate.- After Hoffa was convicted of jury tampering 
in 1964 and went to prison in 1967, Dorfman and members of the mob continued 
to control the fund. But at the end of 1982 Dorfman was indicted along with 
Mafia and Teamster officials for tr>ing to bribe Ne\ada Senator Howard Cannon 
with favors from the Central States Pension Fund, and a month later, January 
20, 1983, Dorfman was gunned down in a parking lot. 

That same year the U.S. Department of Labor finally forced the fund to 
operate according to guidelines enforceable by the courts. That decree resulted 
in a dramatic shift in the way the Central States Pension Fund invested its 
money. ' The message was clear. Wise guys had to find a new "friendly" lender, 
one that offered the same easy, no-questions-asked access to money and the 
same liberal nonrepaymcnt terms. Like a gift out of nowhere, deregulated thrifts 
became the answer to their prayers. President Reagan had just signed the Gam- 
St Germain Act, in October 1982, and the covey of swindlers who had fluttered 
around the Teamsters flocked to savings and loans. Simply put, deregulation 
was the best thing to happen to the mob since Congress passed Prohibition. It 
also provided organized crime with the best money-laundering environment 
since the invention of bearer bonds. No one will ever know how many hundreds 
of millions, or billions, of dollars the mob and drug organizations pumped 
through thrifts during this "anything goes" period. 

But we were told repeatedly by regulators, and even Justice Department 
officials, that the Mafia, the mob, organized crime, the Syndicate, whatever 
label you choose, had not and could not infiltrate the thrift industry in any 

What Happened? • 301 

serious way. Well, we asked, then why had these people shown up in our 

Martin Sehwimnier, Mario Renda's "assoeiatc," was, according to Or- 
ganized Crime Strike Force investigators, an investment advisor for Frank 
"the Wop" Manzo, a reputed member of New York's Luechese crime 
family. (The five New York crime families were Luechese, Gambino, 
Genovese, Bonanno. and Colombo.) 

Mario Renda, who was credited with helping destroy dozens of thrifts 
and banks (possibly a hundred or more), was a friend of Sal Piga, whose 
rap sheet listed him as an associate of the Tramunti crime family (Car- 
mine Tramunti was the boss of the Luechese crime family) and enu- 
merated a criminal record of grand larceny, assault and robbery, burglary, 
first-degree assault, carrying dangerous weapons, and criminal possession 
of stolen property. 

Michael Rapp, a.k.a. Hellerman, who looted Flushing Federal Savings 
and Loan, among others, said in his autobiography that he had worked 
his swindles on Wall Street in the 1970s on behalf of the Luechese and 
Gambino families, and a law-enforcement official said the dividing of 
the loot from his S&'L swindles in the 1980s was the subject of a sit- 
down between the Luechese and Genovese families. 

John Napoli, Jr., a Rapp associate who was convicted with Heinrich 
Rupp in the Aurora Bank case, was identified in an FDIC lawsuit as 
having been associated with "a well-known. Eastern organized crime 
family" (identified by a law-enforcement official as the Luechese family). 

Lawrence lorizzo told investigators he was a Colombo family lieutenant 
and that Renda invited him to join him in his scheme to bust out banks 
and thrifts. 

lorizzo said in federal depositions that Mario Renda told him that he 
(Renda) was handling business for Paul Castellano, a Gambino crime 
family boss who was assassinated in 1985. 

Murray Kessler, indicted with Richmond Harper (identified by the Dallas 
Morning News as a member of the Beebe banking network in the 1970s) 
for smuggling arms to Mexico in exchange for heroin (the case ended 
in a mistrial), was identified by federal officials as an associate of the 
Gambino family. 

Beebe's friend and associate, former Louisiana Governor Edwin Ed- 
wards, was implicated through federal wiretaps in dealings with New 


Orleans Mafia boss Carlos Marcello. Marcello in 1979 bragged to an 
VB\ undercover agent that lie and two or three other mob bosses "owned 
the Teamsters." 

A Beebe-controlled bank made loans to Marcello, his son, and several 
corporations connected to Marcello, according to the bank's president. 

The American Banker revealed that Anthoin Riisso, a former attorney 
and a director at Indian Springs State Bank, had represented Kansas 
City's Civilla mob family, and bank records showed the Civillas had 
.several loans at Indian Springs. For years Nick Civella was the man to 
.see about getting favors from the Teamsters, according to the President's 
Commission on Organized Crime. 

David Gorw'itz, who was with Dick Binder in Santa Rosa (Binder listed 
$1.5 million in loans from Centennial on his bankruptcy papers), worked 
with Binder in Boston. The Boston Globe reported that the pair were 
suspected by law-enforcement officials in Boston of laundering money 
for fugitive mobster Salvatore Caruana, a capo in the New England 
Patriarca crime family. Gorwitz was also described in court testimony 
in the 1970s as a muscleman for the mob. 

Lionel Reifler, who indirectly received money from loans made by Judge 
Reggie's Acadia Savings, was a career white-collar criminal associated 
with Mike Rapp and organized crime figures. 

Morris Shenker, who surfaced time and again in our investigation, was 
identified in congressional hearings on organized crime as a close as- 
.sociate of the Civella crime family. He was Jimmy Hoffa's attorney and 
also a close associate of Allen Dorfman, the insurance executive and 
sophisticated money manager who had extensive connections to the 
Chicago mob (which is reportedly called "the Outfit") and to the Teams- 
ters Central States Pension Fund. The President's Commission on Or- 
ganized Crime reported that Shenker borrowed millions of dollars from 
the fund. Individuals or companies in this book whom we found had 
done business with Morris Shenker included Norman B. Jenson, Philip 
Schwab, Charlie Bazarian, Kenneth Kidwell, Southmark, John B. An- 
derson, Jack Bona, Mario Renda, the Indian Springs State Bank bunch, 
Al Yarbrow, FCA, Sun Savings and its president, Dan Dierdorff. 

Jimmy "the Weasel" Fratianno in The Last Mafioso told of Jilly Rizzo, 
Frank Sinatra's sidekick, associating with him and other mob figures. 
Rapp, in his biography, said Rizzo was his close friend. Rizzo was a 
borrower with Rapp at Flushing and regulators said he was involved with 
Delvecchio at Aurora Bank. Rizzo and Delvecchio sold property in the 

What Happened? ■ 303 

Poconos that became collateral for a loan at Kdniund Reggie's Acadia 
Savings and Loan. 

Guy Olano of Alliance Savings and Loan was said by tlic I'^BI to be 
connected to people with ties to major Colombian drug families. He 
had arranged casino financing through John Lapaglia for Las Vegas 
attorney Norm Jen.son, who himself was later identified in evidence 
collected by Organized Crime Strike Force investigators as a key figure 
in a $300 million drug-money-laundering operation that the Justice 
Department said also involved Centennial Savings vice president Sid 

Philip Schwab failed to get a Nevada gaming license because officials 
had more questions for him than he apparently wanted to answer on 
the subject of his associations with certain Italian surnamed individuals, 
one of whom they described as a convicted heroin trafficker. Consultants 
he hired to help him get the license said in their report, "We can only 
presume at this point that the Gaming Control Board has information 
from law-enforcement authorities associating these individuals with or- 
ganized crime activities." 

At nearly every thrift we researched for this book we found clear evidence 
of either mob. Teamster, or organized crime involvement. Only one conclusion 
was possible: The mob had played an important role in the nationwide fraternity 
that looted the savings and loan industry following deregulation. 

Of course the mob and swindlers didn't suck all the billions out of the thrift 
industry, although they certainly got their share. People who had never com- 
mitted a crime in their lives fell prey to deregulation's promise of easy money. 
Thrift officers watched as the professional swindlers worked their scams and 
never got caught and decided, why not? Buttoned-down appraisers, plugging 
along in boring jobs making $200 to $600 per appraisal, learned that by simply 
raising their opinion of a property's value to match a borrower's needs or desires, 
they could raise their own standard of living as well — and the higher their 
opinion, the bigger their paycheck. Contractors, attorneys, title company ex- 
ecutives, and auditors each found their own ways to get a seat on the gravy train 
by perverting their particular business functions for the cause. As Erv Hansen 
so correctly observed in 1983, "The beauty of this is that there's going to be 
enough money in it for everyone." And there was. 

Something else was going on at thrifts too. We avoided dealing with it in 
detail because we never seemed to be able to get our arms around it, but it 
disturbed us and bears mention. Time and time again during our research we 
ran into people at failed thrifts who claimed to have connections with the CIA. 
We ran into individuals whom we discovered were dealing secretly with the 


Contras. moving large sums of money here, there, and off to nowhere for what 
they claimed were co\ert purpK)ses. 

At San Marino Savings in Southern California we heard about a major 
borrower, G. Wayne Reedcr (who also attempted a couple of failed ventures 
with Herman Beebe), meeting in late 1981 at an arms demonstration with Raul 
Arana and Eden Pastora, Contra leaders who were considering buying military 
equipment from Recdcr's Indian bingo-parlor partner. Dr. John Nichols. Among 
the equipment were night-vision goggles manufactured by Litton Industries and 
a light machine gun.'' Nichols, according to former Reeder employees and 
published accounts, had a plan in the early 1980s to build a munitions plant 
on the Cabezon Indian reservation near Palm Springs in partnership with Wack- 
enhut, a Florida security firm. The plan fell through. Nichols was a self-described 
CIA veteran of assassination attempts against Castro in Cuba and Allende in 
Chile. Authorities said he was a business associate of members of the Los Angeles 
Mafia. He was later convicted in an abortne murdcr-for-hire scheme and sen- 
tenced to prison. 

At Indian Springs State Bank we found Farhad Azima, who financed part 
of his Global Internationa! Airways operations with loans from Indian Springs 
bank. Mario Renda had relationships with Adnan Khashoggi and another deposit 
broker who. federal investigators confirmed, was a former CIA operative who 
laundered millions of dollars through financial institutions for Baby Doc Du- 
valier. the former ruler of Haiti. Investigating Mike Rapp we met Heinrich 
Rupp, a self-described CIA contract pilot, and his associate, who claimed the 
CIA was using banks to launder drug money and get loans that went to finance 
the Contras. 

And there was more, much more. Experts had wondered how so many 
billions of dollars could just vanish from the thrift industry without a trace. If 
some of that money were channeled into the Contra pipeline or used to serve 
other legal or illegal covert purposes, that could certainly be one answer. One 
respected law-enforcement official told us that a man in prison for bank fraud 
had agreed to cooperate with him in an investigation of another bank fraud case, 
in exchange for a good word to the judge, until he was suddenly granted a White 
House pardon. The official said he was told the pardon was obtained through 
CIA chief Bill Casey. And as we were going to press we were working with a 
fellow reporter digging up information that Southmark may have had a rela- 
tionship with some members of the covert Iran-Contra crowd. 

We don't know what all that means. We didn't have time to investigate both 
that story and this one, but we want to be on the record as saying that we finally 
came to believe something involving the CIA and Contras was going on at thrifb 
during the 1980s. After all, deregulation created enough chaos to accommodate 
just about anyone's purposes. And taking out loans from federally insured in- 
stitutions, giving the money to the Contras, and letting federal insurance pick 

What Happened? ■ 305 

up tlie losses does have the flavor of what Ollie North might think was a "neat 

The S&'L industry-inspired "see no evil" approach to tlie looting at thrifts 
helped keep the mounting crisis out of the puhlic consciousness until 1988. It 

; surfaced then only because nonindustry analysts began to insist loudly that the 
FSLIC's losses were approaching $100 billion. Suddenly the American public 

I started paying attention. For two years the three of us had worked in near 

, isolation. With the exception of a handful of other reporters around the country, 
we couldn't find anyone who understood what was happening or seemed to care. 
But suddenly e\cryone wanted to talk to us about the problem. We were just 
winding up our investigation when the General Accounting Office in Wash- 

' ington sent two investigators out to Guerneville. The two buttoned-down bu- 
reaucrats wanted to know if any "La Cosa Nostra types," as they so quaintly put 
it, had infiltrated the thrift industry after deregulation. A producer for CBS's 60 

' Minutes contacted the House Committee on Government Operations to get 
background for a 60 Minutes segment on the thrift crisis, and an attorney for 
the committee referred him to us. He, too, made the trek to Guerneville to 

' spend a few days going through our files. 

The FBI announced that fraud and embezzlement cases settled at financial 

■ institutions were up 42 percent in 1987 and more than doubled (to $2. 1 billion) 
in 1988. In October 1988, Congress finally caught up and announced their 
findings that the country's financial institutions were targets for bust-outs by 
organized crime syndicates and generic swindlers. A House committee reported, 
"At least one-third (and probably more) of commercial bank failures and over 

' three-quarters of all S&L insolvencies appear to be linked in varying degrees to 
[serious misconduct by senior insiders or outsiders]."' 

In 1988 the comptroller of the currency surveyed recent bank failures and 
found that less than 10 percent were caused solely by economic factors. The 
FSLIC began issuing profiles of the failed thrifts it was trying to dispose of (sell, 
merge, give away), and the profiles almost always included tales of looting and 

'insider abuse.* 

' Finally even FHLBB Chairman Danny Wall, who had made a profession 
out of denying that there was a problem, admitted to the House Banking Com- 
mittee's Subcommittee on Financial Institutions in March 1989 that the FHLBB 

'was finding more and more instances of fraud and mismanagement: "In virtually 

■all cases, the boards of directors of resolved [handled by the FHLBB in 1988] 
institutions were found to not have acted prudently." 

But after all was said and done, what would come of it? Had anything been 
learned? Probably not. As far back as 1976 key members of Congress knew what 
might happen if they deregulated thrifts. That year Congressman Fernand St 

306 • INSIDE )OB 

Germain (D-R.I.) had chaired the House hanking subcommittee investigating 
the failure of Citizens State Bank in Carrizo Springs. Texas, and the network 
of businessmen (including Merman Beebe) whom authorities believed were abus- 
ing dozens of financial institutions in the area. As we read the hearing transcripts 
1 1 years later, it was clear that Congress and federal regulators knew in 1976 
what kind of people were out there just waiting for an opportiinit>- to victimize 
financial institutions if given the slightest op)ening. 

During those 1976 hearings St Germain said about bank failures: 

We have been repeatedly told that most major bank failures have been caused 
by criminal conduct. . . . hisider loans have been the principal cause of 
bank failures over the past 1 5 years. . . . 

Yet, he noted: 

Of the 56 banks that failed in the United States between 1959 and 1971. 
34 had passed their most recent examination in a "no-problem" cafegon', 
and 17 of the 34 had been given an "excellent" rating. Undeniably, this 
fact alone points to an increasingly apparent deficiency in the existing ex- 
amination process. 

... All too frequently examiners do not "look behind the loan" as to the 
adequacy of collateral and do not inquire into relationships behveen insti- 
tutions due to agency coordination difficulhes. . . . 

There has been a growing feeling in recent years of the need for greater 
uniformity in statutes and regulations relating to self-dealing loans, conflict 
of interest, duties and responsibilities of boards of directors, and loan lim- 
itations for directors and stockholders. 

With those words St Germain had summed up not only the situation in the 
banking industry in 1976 but also predicted with stunning accuracy the fate of 
hundreds of S&Ls less than ten years later. 

Federal regulators who testified at the Citizens State Bank hearings (among 
those testifying, by the way, was Rosemary Stewart, the regulator whose picture 
would be a target in Tom Gaubert's mini-shooting gallery ten years later) warned 
that their ability to keep swindlers out of the banking industry was severely 
hampered by privacy laws that made it illegal to keep lists of undesirables who 
had a history of abusing financial institutions. Furthermore, anyone who wanted 
to buy a bank could. Only officers and directors, not owners, were required to 
meet certain minimum standards. 

Committee member Representative Henr\' B. Gonzalez (D-Tx.) also sat on 
the subcommittee investigating Citizens State Bank and he made the most ironic 
comment of the hearings: 

What Happened? ■ 307 

Here, however, we have found the one bright spot: namely, tliat the Federal 
Home Loan Bank Board is aware of the situation and is plainly working 
hard to turn it around. Even here we probably must consider strengthening 
enforcement powers of the Federal Home Bank Board. . . . 

Remember, this was 1976. 

But then Representative Gonzalez gave this wise and eloquent summation: 

Charters issued to financial institutions are given for public reasons. Banks 
are supposed to serve the public. They have a public character. It is the 
public that suffers when bank owners and officers buy and sell banks like 
used cars, when they engage in self-dealing, when they plunder and steal. 
We have seen the pattern of flagrant and squalid misconduct in these in- 
stitutions. There is no reason to doubt that other institutions are being 
stripped and raided this very day. 

We have found regulation that is forgetful, benign, and on some levels 
pitiful, hiadequate regulation is what has made possible the kind of outlan- 
dish sordid conduct we have discovered. We have lifted only a corner of the 
rock. What we have seen is enough to disgust anyone. 

Corrective action is needed both at the state and federal level. Administrative 
regulation can be — and must be — strengthened. State statutes need to be 
strengthened. Federal statutes probably need updating, and yet at the bottom 
this is the ultimate truth: no law is going to replace efficient, honest and 
aggressive regulation. 

Six years later Congress, led by St Germain, voted to deregulate the savings 
and loan industry with the Garn-St Germain Act in 1982. (Gonzalez voted 
against both the 1980 and 1982 deregulation legislation.) Had St Germain for- 
gotten everything he saw and learned at Citizens State Bank?^ It would appear 
so. During the time his deregulation bill was pending in 1981 and 1982, St 
Germain was dining around Washington on the U.S. League of Savings Insti- 
tutions' charge accounts.' That little indiscretion earned him a special Justice 
Department probe into his cozy relationship with the U.S. League and the 
$10,000 to $20,000 a year in entertainment they reportedly spent on him but 
he never reported. Though the Justice Department decided not to prosecute St 
Germain, it found "substantial evidence of serious and sustained misconduct." 
A House ethics committee investigation in 1986 alleged that he understated his 
assets by more than $1 million for several years and took at least seven trips on 
Florida Federal Savings' jet (St Germain reportedly had a close relationship with 
the CEO of Florida Federal Savings in St. Petersburg), but they recommended 
no punishment. St Germain's home-district voters voted him out of office in 
the 1988 election, and he thus became the first major Washington politician to 


succumb to the thriftgate scandal. Because any legislation to clean up the savings 
and loan industrv- would have to go through the House Banking, Finance and 
Urban Affairs Committee, which St Germain had chaired, we hoped his ouster 
was a good omen. He was replaced by Representative Henry B. Gonzalez, who 
had spoken so eloquently during the Citizens State Bank hearings in Texas 12 
years earlier and later voted against deregulation. 

St Germain wasn't the only person who demonstrated a flat learning cune 
when it came to the thrift industry. 

in 1988 Wall remembered his benefactor, Senator Jake Garn, by com- 
mitting the bankrupt FSLIC to donating $6,000 to the Jake Garn Institute 
at the University of Utah. When a reporter asked Wall about the do- 
nation, she reported that he replied, "So?" 

In the fall of 1988 members of the U.S. League— who as late as the 
summer of 1987 argued, against all reason, that the FSLIC needed only 
$5 billion to get back on its feet — held their annual convention in sunny 
Honolulu. Network television ran colorful footage on the evening news 
of thrift executives partying on the sandy beaches, showing no apparent 
concern for the billions in losses their industry had incurred, losses they 
had every intention of asking the taxpayer to cover. 

Only a few weeks earlier three officials of the Federal Home Loan Bank 
of San Francisco flew at bank expense to Italy and Spain to choose 
granite samples for the bank's new 20-story headquarters buildmg. (After 
a public outcry they decided to use American sandstone from a quarr>' 
in Pennsylvania.) 

In 1987 an annual survey of executive salaries and benefits showed that 
for the second time in three years thrift chief executive officers got much 
larger increases than CEOs in other industries. In 1987 total compen- 
sation for thrift CEOs increased 13 percent, 5 percent more than for 
CEOs in other industries and nearly triple the 4.4 percent rise in the 
consumer price index.** 

Taken altogether, it was enough to make a taxpayer scream, since by the 
end of 1988 it was being widely reported that taxpayers would probably have to 
fund most of a $200 to $300 billion FSLIC bill, an amount equal to the entire 
NASA budget for the next 20 to 30 years. The potential cost to the average 
American taxpayer was estimated to be at least $2,000 each (or $200 a year on 
every person's 1040 for ten years) assuming the hole wasn't deeper than estimated, 
and that was not a very safe assumption. By the end of 1988 insolvent thrifts 
yet to be closed were costing the F'SLIC $35 to $40 million a day in additional 
red ink, or at least $12.7 billion a vear. 

What Happened? ■ 309 

111 March 1989 President Bush's point man on the thrift crisis, Richard 
Breedcn, warned thrift industry leaders meeting behind closed doors in Los 
Angeles that the new administration's broom was about to sweep the industry 
clean and not to get underfoot. 

"This is a very delicate and very dangerous situation," Breeden said. He 
warned that the administration was in no mood for trouble from either thrifts 
or their lobby groups. "I'm here today to tell you that it would not be in the 
long-term best interests of this industry to oppose our plan. We don't have ten 
months this time to sit around and debate this thing. This is a very dangerous 


Taking the Cure 

The American savings and loan industry' has been damaged beyond repair. Little i 
can be done now to mitigate the damage done by careless and thoughtless 
deregulation. Over the next five or ten years the savings and loan industry as 
we know it today will quietly disappear into history, one of the last relics of post- 
Depression New Dealism. The FHLBB, FSLIC, etc., may gradually be merged , 
with the bank regulatory agencies, and the few remaining distinctions between , 
thrifts and banks will \anish, or the thrift regulatory apparatus will remain to 
supervise financial institutions still called S&Ls but very unlike today's thrifts. 
Perhaps we will be left with community banks — to handle mortgages, consumer 
loans, and small business loans — and commercial banks. In any case, the countr)' 
will have institutions offering home mortgages and a safe haven for deposits, but 
they will bear little resemblance to traditional savings and loans. As deregulation 
progresses, more and more Americans may have to turn to unregulated mortgage 
bankers' for home loans because banks and thrifts lulled by the siren song of 
developers will ha\e little interest in mortgages. 

While the thrift industry plays out its last hand, the American taxpayers 
must concern themselves with how the industry's little $200 to $300 billion 
problem can be solved. There has been and will continue to be a great deal of 
effort expended in Washington to disguise the politically dangerous fact that 
American taxpayers are the only people with deep enough pockets to pay the 
bill. The remaining members of the thrift industry can't pay it.- Already, thrifts 
are paying premiums two times higher than banks are paying and that extra 
expense makes it very difficult for them to compete in the financial marketplace. 
Forcing them to pay even more would only create more casualties. We believe 
it would be inherently unfair to expect the prudently managed thrifts to pay the 
entire cost of this debacle (even though their silent acquiescence allowed the 
situation to get so far out of hand) because the primary responsibilit> for the 


Taking the Cure "311 

huge losses belongs to those who plundered and to politicians who were seduced 
by the thrift lobby and campaign contributions. 

But as with any such sticky issue, officials in Washington were looking 
for a way to fix the problem without personally taking any heat. A wide-open 
debate over the thrift crisis was the last thing Congress, the Federal Home 
Loan Bank Board, or the thrift industry lobby wanted. Too much dirty laundry 
would get aired in the process. To avoid just that the same people who brought 
us this $200 to $300 billion problem began cooking up schemes for quietly 
dealing with it. 

To get a jump on any new Bush administration (nonindustry) initiative, and 
because Congress wouldn't give them the money to close the institutions down, 
the FHLBB initiated a crash program to "sell" 220 of the sickest institutions 
before changes in the tax laws at the end of 1988 made such acquisitions less 
attractive. But to attract buyers the Bank Board had to offer huge financial and 
regulator*' incentives.' Analysts"" said that selling the institutions in this manner 
actually cost up to 40 percent more than simply closing them immediately, 
paying off insured depositors, and selling the institutions' assets. When the 
FHLBB sold American Savings and Loan (a subsidiary of Charlie Knapp's FCA) 
in 1988 to the Robert Bass Group, the buyer put $350 million cash into the 
deal, with a promise of $150 million more within three years. The FSLIC 
subsidized the balance of the transaction with nearly $2 billion of its own money. 
In another "take my wife, please" deal, the FSLIC sold failed Eureka Savings 
to former Bank of America executive Steve McLin's group, America First. As 
part of the deal the FSLIC agreed to pay for all future losses from bad loans on 
Eureka's books and contributed $291 million in cash to make Eureka solvent 
for the new owners. The FSLIC agreed to share the tax-loss benefits with America 
First on a 50-50 basis, just to sweeten the deal, and guaranteed America First 
a built-in profit on troubled assets that came along with the thrift. One source 
close to the FSLIC/McLin negotiations described dealing with the FSLIC ne- 
gotiators as "taking candy from a baby," and in the first seven months of own- 
ership America First reported a $10 million profit from its Eureka Federal 
operations. ^ 

For the first time, The Wall Street Journal reported, thrifts are being run by 
corporate raiders, with assets guaranteed by the government. 

These arrangements were attractive to the FHLBB and some politicians 
because many of the costs were in the form of tax breaks'* and interest payments' 
that can be spread out over many years and may go quietly unnoticed. But the 
losers will be the U.S. taxpayers, who several years from now may have to pay 
an even larger thrift bill than is due today if these same (but even sicker) S&Ls 
wind up back in the taxpayers' laps. It is especially troubling that some of the 
buyers of these insolvent thrifts are other thrifts who are themselves almost 
insolvent or developers with no banking experience but a lot of uses for 


money — those ubiquitous "entrepreneurs." These deals are simply a new batch 
of ticking time bombs. 

Representative Jim Leach (R-lowa) said the deals were too good for the 
buyers but not good enough for the government. What has developed, he said, 
is a giveaway system where the potential profit has been privatized while the 
potential loss has been socialized — exactly the problem that brought us the thrift 
crisis in the first place. 

In 1988 regulators put together what they called the "Southwest Plan," in 
which they created 1 5 large thrifts out of 87 smaller, insolvent ones and threw 
in some federal "assistance." The very first Southwest Plan deal in Texas merged 
four sick thrifts into one large thrift. Southwest Savings Association of Dallas, 
owned by Caroline Hunt, the daughter of one of the Texas Hunt brothers." The 
FSLIC forgave Hunt a debt estimated at $15 billion and contributed $2 billion 
to the new megathrift. Within ten months Southwest Savings was reportedly 
seeking an additional $200 million in federal assistance. In March 1989 the 
comptroller general of the General Accounting Office was saying that the South- 
west Plan had little chance of succeeding. He told the House Banking Committee 
that the FHLBB didn't even audit the 87 Texas thrifts involved in the Southwest 
Plan before arranging their mergers. 

Other mergers and purchases the FHLBB had arranged were already falling 
apart. Ramona Savings in Fillmore, California (its president, remember, was 
arrested at the San Francisco passport office as he tried to flee the country for 
the Grand Cayman Islands), was sold to Midwest Federal in February 1988. 
Within a year Midwest Federal had also failed and news reports alleged fraud 
and misconduct by the Midwest chairman, who was reportedly under FBI in- 

In March 1989 the GAO told the Senate Banking Committee that the FSLIC 
was so disorganized and its record-keeping so sloppy that it was impossible to 
tell how much the deals would eventually cost the federal government and 
whether or not some White Knights got preferential treatment. 

In February 1989 the new Bush administration moved swiftly to take the 
initiative away from the FHLBB and presented a complex plan that was still 
being revised as this book went to press. The most immediate aspects of the Bush 
plan called for the FHLBB to be placed under the direct supervision of the Trea- 
sury Department and the watchful eye of the comptroller of the currency. The 
FSLIC's job of seizing and liquidating the nation's junkyard of insolvent thrifts 
would be handed over to the FDIC. The complex plan also called for $50 million 
for the Department of Justice's white-collar crime and fraud divisions. 

The Bush plan was a clear improvement over the status quo, but the idea of 
the FDIC shouldering the additional burdens of the thrift industry' gave little com- 

Taking the Cure '313 

fort. The same people who decided it was a good idea to lend bilHons of dollars to 
Argentina, Mexico, and Brazil would be deciding what was best for thrifts. 

The FDIC said its assets at the end of 1988 stood at around $18 billion — 
not a lot of money for an agency with plenty of problems of its own. In 1987 a 
record 184 banks failed, costing the FDIC more than $3 billion, and 221 were 
closed in 1988 at a cost of $3 billion to $9 billion. FDIC examiners said there 
were an unprecedented (since the Depression) 1,500 problem banks around the 
country at the end of 1988 — three times the number of problem thrifts that 
remained to be dealt with. In late 1988 a banking industry watch group, the 
Shadow P'inancial Regulatory Committee, reported that the FDIC was itself 
nearly insolvent but wouldn't admit it. The shadow group said the FDIC had 
only $400 million left. 

The FDIC record in dealing with those troubled banks was not much better 
than the FSLIC's in many cases and, like thrift regulators, the FDIC was pol- 
iticized. Jake Butcher, who with his brother was close to the Carter administration 
and looted 23 banks in Tennessee and Kentucky until they collapsed in 1983 
(even though the insider dealing was identified as early as 1977), bragged to a 
journalist that he had helped name a member of the FDIC board. (The Butcher 
brothers are serving 20-year prison sentences for bank fraud.) 

But the Bush administration proceeded with its plan to put the FDIC in 
charge of closing more than 200 insolvent thrifts, and even before Congress 
began to debate the Bush plan the FDIC moved in. Closing those brain-dead 
institutions resolved two immediate problems: first, it stopped the losses that 
such a thrift racked up each day it remained open — an open, insolvent thrift is 
like an open artery; and second, each closure removed another piece of the 
excess capacity created in the thrift industry when everyone rushed to open his 
own money machine after deregulation. But it mired the FDIC in a problem 
the FSLIC had been wrestling with for some time — how to operate and then 
dispose of the assets of the seized thrifts. Regulators did not make good real estate 
managers or brokers, and the stories of their inefficiency and wasted millions of 
dollars came to us by the dozens. 

Acknowledging the magnitude of the problem, FDIC Chairman Bill Seid- 
man said, "The amount of real estate that will be up for sale is likely to exceed 
$100 billion, so it is a huge task, the biggest liquidation in the history of the 

Immediately reports began to surface that with the FDIC turning its attention 
to thrifts, banks were going dangerously unsupervised. The House Committee 
on Government Operations had reported in October 1988 that the FDIC ex- 


amination staff was understaffed then and "failed badly" at meeting its exami- 
nation schedule. In 1986 and 1987, 79 out of 189 state banks that failed had 
not been examined within a year of their failure, 39 had not been examined 
within 18 months, and 29 had not been examined within three years prior to 
their failure. The American Banker reported in March 1989 that hundreds of 
state-chartered banks in Texas were operating essential!) unsupervised, just as 
bank failures in the state had soared from 22 in 1987 to 44 in 1988 to a projected 
50 in 1989. 

Clearly, the only way to successfully tackle the thrift crisis was with a co- 
ordinated, overall attack approved by the Bush administration and Congress. 
Piecemeal efforts had proved inadequate time and time again, and siccing the 
FDIC on thrifts without adequately increasing its staff was just one more example. 
President Bush entreatied Congress to act on his proposal in 45 days, but there 
was no chance whatsoever that they would. And the $35 to $40 million-a-day 
losses continued. 

While Congress tried to deal with the Bush plan, the savings and loan industry 
continued to operate under regulations (especially on the state level) that hadn't 
changed much since the heady days of deregulation. It was true that some 
important improvements had been made. For example, w hen California Savings 
and Loan Commissioner William Crawford succeeded Larry Taggart in early 
1985, he stopped the expansion of the state thrift industr\' dead in its tracks until 
he could get the out-of-control situation in hand. From 1981 through 1984, 
California regulators had approved 172 thrift charters. From 1985 through 1988, 
Crawford approved one. 

Federal and state regulatory agencies were in general beefing up their staffs 
with more regulators and examiners. And some important re-regulation had 
occurred on the federal level, including: standards were raised for thrifts seeking 
FSLIC insurance; in 1985 Gray placed limits on growth, raised minimum net- 
worth requirements, and limited direct investments; in 1986 he increased reserve 
requirements; and the FHLBB began demanding more accurate appraisals. In 
addition, savings and loans had to start carrying assets on their books at values 
that more closely reflected actual market values. While the new standards 
came with qualifications that blunted some of their effectiveness, and the . 
philosophy of forbearance continued, these were important steps in the right i 
direction. But regulators and Congress still needed to develop a comprehensive 
program to ensure that savings and loans (and banks) would stop acting like 
drunken sailors. 

Banks and thrifts should be held to the same standards when they are serving i 
the same market, and the following points must be addressed in any future i 

Taking the Cure '315 


The issue of politics as played in the halls of Congress hardly needs further 
mention here except to report the ironic results of the ethics probe of Speaker 
Jim Wright. The outside counsel to the House Ethics Committee, Richard 
Phelan, submitted his report F'ebruary 21, 1989, and concluded that in savings 
and loan matters Wright broke House rules four times: 

When he removed the recap bill from House consideration in order to 
pressure the Bank Board to change its resolution of the Craig Hall matter. 

When he sought a change in the Bank Board's decision to oust Tom 
Gaubert from Independent American Savings. 

When he attempted to "destroy [joe] Selby's career" based upon the 
accusation that he was a homosexual. 

When he tried in early 1988 to get Danny Wall to fire William Black 
(by then Black was working for the FHLB in San Francisco and was not 
within Wall's jurisdiction). 

But the House Ethics Committee ignored Phelan on the S&L matters. 
Members concluded that Wright violated House rules 69 times, but not when 
he tried to get a little service for his thrift constituents. 

Still, the savings and loan issue wouldn't die. In May 1989 during the Dallas 
trial of some Commodore Savings Association officials (for allegedly illegally 
firnneling corporate money into a political action committee headed, coinci- 
dentally, by Wright's friend Tom Gaubert), defendant John Harwell, a former 
Commodore vice president, said Wright solicited campaign contributions for 
Democrat Jim Chapman during a meeting of S&L executives in Dallas and also 
said Wright understood the problems that pending direct-investment legislation 
could create for thrifts. Subsequently, the PAG received large donations, some 
of which went to Chapman, according to press reports, and the legislation never 
made it to the House floor. Wright denied any connection, saying, "You can 
look until you're blind, ask until you're hoarse, listen until you're deaf and you 
will never find anybody of whom I've asked anything in return." 
I If the FHLBB remains in operation, several changes need to be made to 
help keep political pressure from playing such a strong role in the regulation 
process. The Bush plan called for the elimination of the three-member Bank 
Board, but if it is retained, the three members should be appointed for si.x-year 
terms rather than the current four-year terms. The requirement that no more 
than two members can belong to the same party should be eliminated — the 
White House should select the best-qualified people regardless of their political 



affiliation. The FHLBB should not oversee the FSLIC— the FSLIC should be 
a separate entit\', free fi'om any political pressure the FHLBB might exert. 

Though transferring examiners to the district banks served an important 
purpose when Gray couldn't get Stockman's approval for more examiners, it 
created a possible conflict of interest when a president of a troubled S&L was 
sitting on the board of the supervising district bank (FHLB directors are elected 
by the member S&Ls). Charles Keating raised the further objection that his. 
company's thrift, Lincoln Savings, was being regulated by officials (the San 
Francisco FHLB board, which was made up of savings and loan executives in 
his district) who were in competition with him. But even under the old system 
the potential for conflict of interest existed. For example, when examiners from 
the FHLBB were examining Empire Savings' books in 1982, Empire Chairman 
Spencer Blain was an official of the FHLB of Little Rock, which was responsible 
for any disciplinary measures that might grow out of the examination. 

The Topkea Federal Home Loan Bank, under its president, Kermit Mow-r 
bray, became embroiled in several political controversies, and an official said 
Mowbray was sharply criticized by Ed Gray for not being tough enough in his 
sujjervision. For example, regulators said, the Topeka bank had been receiving 
warnings since 1985 that Silverado Savings of Denver was on a collision course 
with disaster, and Silverado borrowed heavily from the Topeka FHLB, but no 
significant supervisory action was taken against the $1 billion thrift until it was 
finally declared insolvent in December 1988. (The thrift fell within the juris- 
diction of the Topeka FHLB.) A former analyst for the Topeka FHLB, James 
Moroney, went public with his conviction that politics was the reason. Moroney 
declined to elaborate, but published reports said Larn- Mizel, a Republican 
activist who had raised over $1 million for the Republican party, was a borrower 
at Silverado; Neil Bush, son of then-Vice President Bush, sat on SiKerado's I 
board of directors;** and Silverado's chairman, Michael Wise, was reported by I 
the Denver Post to be a favorite of the thrift lobbying organization, the U.S. 

"The problem in my assessment," said Moroney, "was the lack of separation 
between the examination and supervision function at the I'opeka bank."'" 

Deposit insurance: 

There is a place for the entrepreneurial bank or thrift in today's marketplace, 
but the risks such a nontraditional institution takes should not be underwritten 
by federally backed deposit insurance. Until the politically powerful in the thrift, 
industry are willing to let go of the FSLIC security blanket in return for the 
right to wheel and deal, all their talk about free enterprise is simply hypocrisy. 
Deposit insurance was established so the common person could be assured that 

Taking the Cure '317 

his relatively meager life savings could be invested safely. It's time to get back 
to that concept. 

Deposit brokers: 

Deposit brokers' access to thrifts was limited in the 1960s precisely for the reasons 
Gray wished to limit them again in 1984: Their ability to scour the countryside 
for the highest rate in the nation creates an atmosphere that pushes rates up, as 
institutions compete for the easy-to-get institutional deposits, and encourages 
thrifts to use the expensive deposits in high-risk ventures. Insured brokered 
deposits also are too easy a source of fuel for fraudulent deals. 

We believe, however, that the problem is not necessarily the brokers them- 
selves but, again, the insurance coverage. Deposit brokers can perform a legit- 
imate and important function by efficiently moving money around the country, 
but we should limit FSLIC insurance coverage to $100,000 per deposit broker, 
per institution. Even Mario Renda would have had difficulty getting normally 
honest thrift officials to sell their integrity for a $100,000 deposit. 

Capital requirements: 

Before deregulation, thrifts were supposed to have 5 percent of their total assets 
in tangible reserves to cover unexpected losses. But regulators dropped the re- 
quirement to 3 percent in 1981 as fewer and fewer institutions were able to meet 
the 5 percent standard. The 3 percent rule, coupled with a regulation adopted 
in 1972 that allowed thrifts to meet the reserve requirement by averaging reserves 
over a five-year period, allowed thrifts to grow much too fast, if they were so 
inclined, and the crooked ones were. This high leveraging capability was one 
of the chief elements that attracted "entrepreneurial" owners into the industry. 
TTie brake on lending that the reserve requirement achieved disappeared. 

A high capital requirement is a key element to a healthy banking or thrift 
industry, and we applaud a movement within the industry to support an 8 percent 
reserve requirement that would increase as a thrift's investment risks increase. 
The FHLBB attempted a decade ago to develop a risk-based reserve requirement 
but abandoned the plan in 1980 when the thrift industry objected. If the FHLBB 
had stuck to its guns, much of the artificial growth that followed would not have 
been possible. 

Regulatory agencies: 

Deregulation of the financial services sector has blurred the distinctions be- 
tween financial institutions. Mortgage brokers and commercial banks, as well 


as thrifts, now provide traditional home-loan mortgage services. As a result 
many people feel a separate thrift industry is no longer needed." But if thrifts 
do continue to exist as a separate entity, they must be prepared to fund an 
adequate regulatory stafi' and be able to offer auditors and examiners salaries 
equal to what they could earn at private auditing firms — only then can they 
expect to attract quality staff. If thrifts are at all reluctant to pay the bill 
for such a regulatory structure. Congress could take this opportunity, this 
crisis atmosphere, to swiftly put the industry out of its misery. They could 
liquidate the twelve district banks and apply to the FSLlC's deficit the estimated 
$13 billion in equity that the district banks hold, fill the rest of the FSLIC 
hole with a federal bailout, and liquidate the FSLIC. Close all the sick thrifts 
immediately and send the healthy ones out for applications to become banks. 

Accounting principles: 

Accounting practices used by thrifts (Generally Accepted Accounting Prin- 
ciples and Regulatory Accounting Principles) were practically impenetrable 
except by specially trained accountants. They looked like something authored 
by Lewis Carroll. In dozens of ways thrifts could legally doctor their balance 
sheets, and they used those smoke-and-mirror accounting methods — usually 
with the regulators' blessing — to hide the sorry truth of their deteriorating 
condition from the public and, to some extent, from themselves. Thrifts 
should be required to adhere to accounting methods that reflect reality, 
no matter how distasteful that reality may be. They should be required 
to regularly revalue their assets to current market conditions ("mark to 

Screen the thrifts' ofiicers, directors, and owners: 

Set up a process modeled after the New Jersey and Nevada Gaming Control 
Boards, which screen and thoroughly investigate applicants for gambling licen-ses. 
Look into applicants' pasts, their records in other jurisdictions, and their asso- 
ciates. Determine the source of the funds that applicants are using to capitalize 
their new institution. (Herman Beebe grubstaked more than one unethical 
banker.) And after they are approved for a charter, recall thrift owners for a 
thorough reevaluation at the slightest breath of scandal. If it's determined that 
they hang around with crooks, show them the door. Don't let con men be 
bankers. Don't let borrowers be lenders. Remember the words of California's 
tough Savings and Loan Commissioner Bill Crawford: "The best way to rob a 
bank is to own one." And the words of Willie Sutton when he was asked why 
he robbed banks: "Because that's where the money is. " 

Taking the Cure • 319 

Rewrite bank secrecy laws: 

It's high time to bury the Depression-era fear of runs on hanks. I'hat phobia is 
one of the underlying justifications for the secrecy that surrounds Bank Board 
actions, but, in fact, the best thing that could have happened to the thrifts in 
this book would have been an early run on deposits to force more timely action 
bv regulators. Secrecy was the single most important factor in allowing losses at 
thrifts to get so large. It played directly into the hands of anyone who had 
something to hide. It even prevented ethical S&L managers from monitoring 
their own industry, because when they reported their concern about a high flier 
to regulators, they never heard another word about the case. 

The secrecy was inevitably carried to ridiculous extremes, as when regulators 
sent us several short biographies ("bios") of themselves, prepared for the media 
. . . and each one was stamped "confidential. " 

We recommend opening thrifts and banks to the light of day, and if depositors 
don't like what they see and decide to take their money elsewhere, so be it. 
Examination reports, for example, should immediately be made public. If Ver- 
■ non Savings' depositors had discovered the kinds of screwball deals that thrift 
was involved in when its assets were only, say, $300 million, and there 'd been 
an ugly little run on deposits, forcing regulators to pay attention, think how 
much the FSLIC would have saved. Instead, secrecy let Vernon swell to over 
$1 billion in assets before it finally collapsed — all in the name of "privacy." 

Law enforcement: 

The nation's legal systems weren't prepared for the upheaval that followed de- 
regulation. Prosecuting financial fraud cases became a nightmare, partly because 
it was a fairly simple matter to bust out a thrift or bank without clearly breaking 
a single law; Borrow (or have your associate borrow) lots of money, never pay 

i it back, blame a bad local real estate market or (if the scam was in the South- 
west) the falling price of a barrel of oil, and enjoy the proceeds tax-free since 
debt is not taxed. Prosecutors had a tough time proving intent to defraud. 

I "Let me wave a pair of bloody underwear in front of a jury in a murder trial 
and I can have their undivided attention," complained one U.S. attorney. "But 

I let me wave a handful of phony deeds and loan applications in front of that 

I same jury and their eyes just glaze over." 

Congress should pass legislation that expands and redefines bank fraud and 
establishes new and more severe penalties, particularly for those who have a 

j history of abuses at institutions. There are too many cracks in the law through 
which highly sophisticated criminals can slip. 

White-collar crime is a growth industry and the Justice Department's small 
fraud task forces are not an adequate weapon against it. Nor are individual FBI 


agents chasing swindlers around their own blocks. Just as the Justice Department 
created permanent regional organized crime strike forces around the countr)', 
they now need to establish similar white-collar crime strike forces. Such strike 
forces could keep track of these highly mobile swindlers as they move from 
jurisdiction to jurisdiction, state to state. And, as the strike forces did with the 
mob, they could penetrate the nehvork of associations that white-collar criminals 
use to facilitate their schemes. ITiey could establish long-term sting operations 
and place in the field undercover agents who would act as an early warning 
system when a scam was about to go down. Only then would prosecutors have 
an effechve weapon against the growing number of economic terrorists bleeding 
today's financial services industry. 

Not only is no such white-collar crime strike force being considered but, 
remarkably, one of the first suggestions made by Attorney General Richard 
Thornburgh upon taking office in 1989 was that the 24 regional organized crime 
strike forces be eliminated. We found incontrovertible evidence of organized 
crime involvement in the thrift crisis, but Thornburgh wanted the strike forces 
disbanded and merged with the I'.S. attorness, who have so often proven them- 
selves ineffective in battling bank and thrift fraud. The battle was a bureaucratic 
one, with Thornburgh supporting the U.S. attorneys, who didn't like having 
independent strike forces operating in their jurisdiction. But we remembered the 
trouble Mike Manning had finding a U.S. attorney who would take the Mario 
Renda case, and we strongly agreed with assistant U.S. Attorney Bruce Maffeo, 
who prosecuted Renda in Brooklyn, when he said, "The First United Fund case 
provides a vivid example of why the organized crime program is necessar)' to 
effectively investigate and prosecute complicated financial crimes. Without the 
institutional dedication of resources and time that the organized crime sechon 
uniquely affords, this case and others like if would nc\er have been solved." 
The strike forces should not only be retained, but they should be expanded to 
include non-mob white-collar crime. Another change in the works, moving 
white-collar crime out of the jurisdiction of ci\il racketeering laws (RICO), is 
another bad idea. Securities, accounting, commodities, and other industries are 
lobbying against the Racketeer Influenced and Corrupt Organization Law, but 
it is a powerful tool against economic, white-collar crime. As Thornburgh said, 
it is one of the few federal laws designed "to attack the business of crime." 

The Bush plan did call for a token increase of $50 million in the Justice 
Department's white-collar crime budget, but it would be a mere drop in the 
bucket. When we considered that just one of our alleged thrift abusers, Tom 
Nevis, got over $80 million in loans from a single failed thrift, according to the 
FBI, $50 million seemed insignificant — and so would be its effect. 

Federal judges need to be schooled on the damage that white-collar criminals 
do. Too many major white-collar swindlers, like Herman Beebe, get meaningless 
short sentences. Judges need to get away from the notion that a person who robs 

Taking the Cure '321 

a bank with a gun and one who defrauds it with a pen are someiiow different. 
They are not. Only their techniques differ. Kither way, the money has been 
stolen. In fact, bank robbers usually run out the door with only several thousand 
dollars, while the average swindle nets hundreds of thousands, or millions, of 
dollars. White-collar criminals should be sentenced to hard time at regular 
mainline federal prisons, not minimum-security "country clubs." Anything less 
fails to establish a creditable deterrent to bank fraud. A new sentencing law 
should include a clause for bank fraud that reads: "Use a Pen, Go to Jail." 

Fortunately, new federal sentencing guidelines that went into effect Novem- 
ber 1987 prescribe minimum prison terms based partly on the amount of money 
stolen, regardless of whether the theft was robbery or fraud. Unfortunately, the 
law went into effect too late to apply to many of the S&L looters. Meanwhile, 
the five-year statute of limitations is running out on many of their crimes, and 
they are laughing up their silk sleeves. 

FSLIC legal action: 

The FSLIC typically files civil lawsuits against officers and directors of institutions 
they believe have been "mismanaged." If the officers and directors of a failed 
thrift have assets, the FSLIC should take them. If they don't, the FSLIC should 
go after the officers' and directors' insurance coverage. Too often we saw the 
FSLIC spend millions of dollars to get a civil judgment against a crooked former 
thrift officer, only to agree later to a settlement that was a farce. 

In 1988 regulators settled secretly with Frank Domingues and Jack Bona, 
whom they had sued in connection with $200 million in loans that contributed 
to the failure of San Marino Savings and Loan, San Marino, California.'' When 
we contacted regulators in Washington to find out the terms of the settlement, 
we were told the terms were secret, put under court seal at the request of both 
the plaintiffs and defendants. If the FSLIC is going to spend a small fortune in 
legal fees to sue these people, then they must be prepared to demand settlements 
that are not just one more travesty, and those settlements should be made public. 

The FSLIC hired a law firm to sue David Butler, former CEO of Bell 
Savings and Loan, San Mateo, California," and in the settlement that followed 
Butler agreed he was responsible for $165 million in losses incurred by Bell 
while he was in charge. Butler had been an extravagant spender, even having 
a $6,000 leather toilet seat installed on his corporate jet and reportedly buying 
his secretary a new Maserati. The final judgment the FSLIC agreed to, however, 
limited Butler's actual liability to $290,000 in cash and to what the judge de- 
scribed as some nearly worthless stock. Butler was allowed to keep his $190,000 
home and his $40,000 vintage biplane, and the FSLIC agreed to pay him $110 
a day for his time and trouble while he cooperated with its investigation. A 
federal judge vacated the settlement in 1988, calling it a disgrace and saying. 


"The court feels FSLIC owes more of a responsibilih to the American taxpayers." 
The legal fees collected by the firm representing the FSLIC in the Bell case 
would have dwarfed the quarter million in cash they "recovered" from Butler. 
Anyone who admits to causing $165 million in losses should be stripped naked 
of assets. But apparently the FSLIC felt that a man and his biplane should not 
be parted. 

Ethics in government: 

The relationships that developed between politicians and thrift abusers consti- 
tuted a breach of ethics at best and in some cases smacked of corruption. It's 
outrageous that politicians who helped protect and perpetuate much of the thrift 
scandal were allowed to wrap their actions in the disguise of "conshtuent service. " 
Their real constituents should give them the boot (as Rhode Island \oters did 
St Germain in 1988), because those congressmen and senators weren't helping 
constituents, they were protecting their financial supporters. When they should 
have been guarding the public's interest, they were instead repaying old debts. 
And to prove that nothing had changed, the Federal Elections Commission 
revealed that in 1988 33? congressmen and 61 senators received donations from 
thrift lobbyists. Voters should vote out of office legislators who do not demand 
from themselves and others the highest possible ethical standards. When powerful 
leaders like Jim Wright can hold up a piece of emergency legislation like the 
recap bill, in order to extort concessions for constituents from federal regulators, 
they have violated the public's trust (to the tune of more than $100 billion, said 
some analysts who believed losses could have been held at $1 5 billion if regulators 
could have closed institutions as soon as they became insolvent). If Congress 
and the Justice Department haven't the stomach to do what is necessary, then 
the voters should. 


Appraisers played a critical role in much of the looting that occurred at thrifts. 
Behind nearly every fraudulent loan was a phony appraisal. Time and time again 
properties were grossly overappraised to justify large loans that were ne\er paid j 
back. At one Southern California thrift, regulators found a half dozen appraisals 
on a single piece of property that began at $2 million and went up to $175 
million. "The last appraisal even had a big red seal on it," recalled California 
Commissioner Bill Crawford. "I'd never seen one with a seal on it. It looked 
real official." The FSLIC later sold the property for $2.5 million. States should 
license appraisers. Most states now license real estate salespersons and brokers, I 
and the slightest accusation of illegality , misrepresentation, or fraud can result 

Taking the Cure ■ 323 

in suspension or revocation of that license. All states license barbers. Why should 
appraisers be any different? Currently, appraisers can belong to private profes- 
sional organizations that allow them to put official-sounding letters after their 
names, but nowhere are they licensed. 


Many thrifts failed not long after receiving perfectly clean bills of health from 
their auditing firms. By March 1989 the FSLIC had sued ten accounting firms 
that had audited the books of failed S&Ls and more suits were on the way.'"* 

• The auditors deflected criticism by saying that their audits could only be as good 
as the information provided to them by the thrift's management, and if that 
information was fraudulent, they weren't responsible. 

When auditors examined a thrift's books, they were not required to look 
for fraud, but if they should happen to see any, they were required to report 
it to thrift management, which might not be the best move if the thrift 
management itself was involved in the scam. Auditors should be required to 
look for fraud and to report to federal regulators, who can then confirm the 
suspicions and contact the FBI. Auditors also do not now have to include in 
their annual audit any suspicion they may have that the company might be 
about to collapse. Clearly, they should be required by law or by industry 
standards''^ to include such information. If thrift officials pressured auditors (or 
promised them rewards) to overlook fraudulent deals or other discrepancies, 

I auditors should be required to report the pressure to federal regulators. Auditing 
firms that were found to routinely certify thrifts that fail should be barred from 
auditing thrifts. 

Adjustable rate mortgages: 

ironically, the deregulation thrifts most needed in the 1970s was one of the 
simplest: allowing thrifts to offer adjustable rate mortgages. The industry lobbied 
heavilv for the ARMs in the 1970s, but Congress — trying to please consumers 
— refused. '*■ Deregulating interest rates on both the deposit and loan sides would 
have allowed thrifts to make all the adjustments they really needed during both 
inflationary and deflationary periods. Rates on deposits were finally freed up by 
the Depository Institutions Deregulation and Monetary Control Act of 1980, 
and rates on loans were freed up in April 1981 when then-chairman of the 
FHLBB Richard Pratt authorized thrifts to use ARMs. But by then it was too 
late. Forces for thorough deregulation had already been set in motion by the 
interest rate crisis of the late 1970s. The savings and loans that did survive the 
1980s steered a conservative course, ignored deregulation as much as possible, 
and simply took advantage of unregulated deposit and loan rates. " 


What we hof)e will come from the thrift industn' carnage is a careful reas- 
sessment of what can and cannot be deregulated in this countr\' and a rec- 
ognition that deregulation is one thing while unregulation is something else 
entirely. Deregulating segments of the financial services industn.' is, condi- 
tionally, a good idea. Federal meddling in private financial services, like plac- 
ing tariffs and import quotas, can smother the most efficient business and turn 
it into a lumbering U.S. Postal Service-type beast. But Congress must learn 
to treat financial service deregulation like brain surgery, realizing that if too 
much is cut away, the patient will begin acting in bizarre, unpredictable, and, 
often, self-destructive ways. 

Congress now is besieged with banking industry pleas to deregulate com- 
mercial banks.'* Banking lobbyists are clamoring for bank deregulation today 
the same way thrift lobbyists clamored for thrift deregulation a decade ago. E\en 
their arguments are the same, as bankers complain that they need more "freedom 
to compete." They, too, want freedom from what they see as a "regulatory 

In the late 1970s, when thrifts found themselves caught in the interest rate 
squeeze caused by inflation, thrifts begged for the right to diversify their invest- 
ments. Today banks, being squeezed by ill-advised loan decisions they have 
made over the past two decades (loans to Third World countries, in particular), 
also want to diversify into fields where they hop)e they can make up the losses, 
particularly into undervvriting securities and insurance. They want the restrichve 
features of the Glass-Steagall Act removed, and they certainly never mention 
that one of the reasons Congress passed the Glass-Steagall Act after the Depression 
was that risky transactions conducted between banks and their securities affiliates'" 
led to many bank failures when the market crashed in 1929.-" Robert Glauber, 
Treasury undersecretary for finance, said in May 1989, "Once we get the thrift 
industry legislation passed, we are going to go back to our agenda of structural 
reform" (a euphemism for bank deregulation). 

Banks are crying for deregulation, but they are not offering to give up federal 
deposit insurance or accept a risk-based insurance system. That would be more 
"deregulation" than they have in mind.-' And bankers are not offering to pay 
for more examiners, examiners trained in the ways of the complicated and risk- 
ridden securities industry. What they say they will do is erect .so-called fire walls 
that would theoretically keep their federally insured banks separate from their 
Wall Street stock-trading operations. But when the stock market crashed in 
October 1987, Continental Illinois National Bank and Trust in Chicago^' 
promptly lent its option-trading subsidiary over $90 million to cover margin 
calls, in direct violation of an existing fire wall.-' For another example of fire 

Taking the Cure • 325 

walls that didn't work, we have to look no further than the thrift industry: Thrifts 
were limited in the amount of money they could loan to themselves or to their 
own projects, so they found other thrifts who wanted to play and they made 
quid pro quo loans back and forth to each other. Banks, too, will work out back- 
scratching arrangements with their friends. So much for fire walls. 

It's hard to believe Congress would contemplate significant deregulation of 
banks before they have come to grips with the monumental mess they created 
by deregulating thrifts. And look who's giving Congress advice on the subject 
— Alan Greenspan, chairman of the Federal Reserve Board. He assured Congress 
in 1988 that deregulating banks and abolishing the 55-year-old Glass-Steagall 

' Act was a great idea and held nothing but benefits for the nation and for banking. 
Just four years earlier the very same Alan Greenspan had advised Ed Gray to 

1 stop worrying so much about deregulated thrifts because things were just fine 
and would only get better. 

Swindlers have always targeted banks, but with mixed success prior to de- 
regulation. An FBI agent in Texas told us, "The only difference [between banks 
and thrifts in Texas] is that the FDIC still has its head in the sand. When I 
looked at the banks that closed between 1984 and 1987, in many of them I 
found people I knew, the same S&L crowd I'm investigating from the failed 

I thrifts here." Attorneys at private law firms who worked for both the FDIC and 
the FSLIC told us the same story. 

About bank deregulation, U.S. Attorney Joe Cage said, "Some of the same 
people who took down savings and loans, they're out in the securities business 
and banking, already in place, just waiting for Congress to abolish the Glass- 
Steagall Act. When it happens I'm afraid they'll take the banks just like they did 
the savings and loans." 

1 Our conclusion that S&Ls were in large part looted by a hit-and-run network 
that would pose the same threat to deregulated banks was reinforced by the 
Housing and Urban Development (HUD) scandal breaking as this book went to 
press. While the national press focused on powerful Republicans who got huge 
consulting fees for pedaling their influence with insiders at HUD (for HUD 
approval of their clients' projects and the low-interest loans and tax credits such 

I approval carried), we saw other patterns emerging: 

' The ethics report on Speaker Wright said that in 1983 he personally appealed 
to HUD Secretary Samuel Pierce for approval of a HUD grant to help a company 
owned by Wayne Newton, Billy Bob Barnett, William Beuck, Steve Murrin, 

' Don Jury, and others restore the Fort Worth stockyards. When the application 

' was denied, Wright got Senator Paul Laxalt to write to Pierce in support of the 
grant and the project was eventually approved. (It later went into bankruptcy in 
spite of efforts by Wright's friend George Mallick to bail it out.) 

An FBI affidavit filed in a Washington, D.C., court (in support of a request 


for a warrant to search the offices of DeFranceaux Rcalt>' Group [DRG] and its 
affiliates) revealed that the Justice Department beheved DRG (approved by HUD 
to act on its behalf) in 1988 sold repossessed property' to Southmark at below- 
market value (for example, Southmark paid $2.3 million for Dallas property 
DRG had loaned $6.4 million on just hvo years earlier). At the time DRG was 
trying to get a $1 5 million loan and a $25 million line of credit from San Jacinto 
Savings and Loan, a Southmark subsidiary. HUD was liable for 85 percent of 
the "loss" on such sales. 

The affidavit also claimed that in September 1984 DRG loaned Colonial 
House Apartments in Houston $47 million based on DRG's appraisal that the 
projjerty was worth $60 million. In 1988 DRG had to foreclose. A few months 
later HUD appraisers said the apartments had been only 6 percent rented when 
the loan was made and were worth at that time only $13 million, not $60 
million. In 1989 HUD estimated it would lose over $35 million on the deal. 
The Houston Post reported that Colonial House Apartments apparently was 
owned at least part of this time by a limited partnership (in a tax-shelter invest- 
ment) headed by a group of s\ndicators that included Howard Pulver. Pulver's 
group in 1984 and 1985 sold $333 million in mortgages (appraised at the time 
by the county for only $192 million, according to the Post) to Mainland Savings 
in Houston, where Martin Schwimmer and Mario Renda placed some of their 
pension deposits and where Adnan Khashoggi also did business (in 1985, for 
example. Mainland reportedly paid Khashoggi $80 million for 21 acres the 
county was appraising at only $41.5 million). Repxjrter Pete Brewton discovered 
that Pulver li\ed practically across the street from Schwimmer in an exclusive 
Long Island neighborhood, yet the two men did not admit to knowing each 
other. Mainland collapsed in 1986. 

In 1988 Charles Bazarian was actively involved in locating property that 
qualified for HUD tax credits. It was then packaged and sold as tax shelters. The 
FBI was said to be investigating Bazarian's relationship with HUD. 

So the S&'L and HLID scandals were not hvo separate stories. They were 
the same story. The fund that insured HUD's Federal Housing Administration 
(FHA) mortgages was reported to be at record lows and whispers of another 
taxpayer bailout had begun. 

Would banks be next? 

Those considering bank deregulation should go slow. Very slow. Keeping 
in mind that hvo simple, well-thought-out adjustments — flexible deposit rates 
and adjustable rate mortgages — were all that was needed in the 1970s to save 
the thrift industry, while sweeping deregulation and expanded powers destroyed 
it. Deregulation is powerful medicine. A little goes a long way. 

And the money lost in the savings and loan crisis, as horrendous as it is, 
would pale beside a similar fleecing of the banking industr)': I here were only 
3,200 savings and loans in the United States, but there are over 14,000 banks. 

Taking the Cure ■ 327 

j We leave this project knowing this will probably be the most important story 
the three of us, as journalists, will ever work on. 

We have tried to give the reader a sense of the vast scope and depth of this 
jscandal, but there was no way we could cover ever>'thing in the space allowed. 
iWe investigated many more failed thrifts than we could mention in this book. 
For every scam we chronicled, we left a hundred out. For every connection we 
^made between key players, organized crime figures and thrifts, we had to leave 
(dozens out. it would have literally taken several volumes to chronicle this story 
in its totalitv'. There was so much more that we would have liked to have told 

We began this project as seasoned reporters, but we were not prepared for 
the depth of corruption and the pervasiveness of white-collar crime that we 
found. "Somefirnes I think the only thing keeping this economy going anymore 
,are bust-out scams," a business reporter quipped to us one day. The words of 
;one exhausted FBI agent seemed to sum it up: "Trouble today is that too many 
jpeople in business are just no damn good." 

I But besides the criminality we discovered a pervasive feeling that anything 
Inot actually illegal or specifically prohibited by thrift regulation was fair game. 
Traditional standards of right and wrong were ignored. Too many people in the 
thrift industry simply sold their fiduciary responsibilities to the highest briber. 
Whatever had infected Wall Street in the 1980s found its way into S&Ls as 
JA-ell — a burning greed that consumed long-standing American ethical standards. 
j "An ethical person is someone who does more than is required and less than 
IS allowed," said Michael Josephson, former law professor turned ethics teacher. 
The thrift rogues turned that maxim on its head. If this book has a message, it 
iS that the fabric of American society is being systematically weakened by the 
ijrowing number of people willing to sell their values and principles for a fast 

j But perhaps most dangerous of all was the willingness of honest people to 
jolerate, rationalize, and even do business with the crooks. Erv Hansen could 
liever have flown as high as he did for three years without the cooperation of 
;Tiany people in Sonoma County, California. As a respected Nevada judge said: 
I "It won't be the bad people who destroy this country. It'll be the good people 
vho rationalize the bad people's conduct." 



As we finished our investigation we looked back at what had become of the key 
players in our drama. The answer was — not much. 

Erv Hansen died in his sleep, uncharged of any crime, after nearly two 
years of FBI investigations. His victim. Centennial, on the other hand, 
lay dead with a $165 million hole in her broadside. 

Hansen's accomplice, Beverly Haines, spent just 67 days (of a five-year 
sentence) in prison before a soft-hearted federal judge (Robert Peckham) 
released her to a halfway house in San Francisco, where she was allowed 
to dine out at local restaurants. At press time she was spending her 
weekdays in the halfway house and going home on weekends. 

Sid Shah was indicted for drug-money laundering, but he was not in- 
dicted in connection with the Centennial case. The FSLIC sued him 
to try to recoup some of its losses at Centennial, and both the drug trial 
and the FSLIC civil case were pending at press time. (In April 1989 the 
government's key witness in the drug case, Michael Stevenson, was 
reported missing.) The FBI said their investigation of Shah's activities 
at Centennial remained open and active, but at press time, over four 
years after Centennial closed. Shah remained uncharged with any wrong- 
doing involving Centennial's downfall. He was living and working in 
Santa Rosa. 

Noiman Jensen cut a deal with federal Organized Crime Strike Force 
prosecutors for some level of immunity in the drug-money-laundering 
case. Since it wasn't a crime at the time, Jenson wasn't prosecuted for 
paying thrift president Guy Olano a $50,000 kickback — Jenson called 


Epilogue ■ 329 

if a legal fee — in return for his $4 million casino loan. At press time 
jcnson continued to live and work in Las Vegas. 

The Soderling brothers pleaded guilty to bank fraud and were sentenced 
to seven years in prison with all but one year suspended. They were 
released in late 1988 after serving about six months. 

Robert Ferrante of Consolidated Savings and Loan, which failed in 
1985, was the subject of a disorganized, on-again off-again FBI inves- 
tigation and remained uncharged at press time. He hired a public re- 
lations person to take his calls and aggressively maintained his complete 

Jack Bona and Frank Domingues, who, regulators said, pulled $200 
million out of San Marino Savings in loans secured by only about $100 
million in property, settled with the FSLIC before their civil trial began. 
That settlement was sealed upon the request of both the defendants and 
the FSLIC and neither would disclose how much, if anything, the pair 
agreed to repay. Neither man was charged criminally. The U.S. attorney 
declined the San Marino case reportedly because FHLB examiners had 
failed to supply the FBI with the necessary evidence. Bona disappeared 
after his fling at the Atlantic City Dunes. At press time Domingues, 
authorities told us, was still the subject of an ongoing FBI investigation 
for loans he got from South Bay Savings and from Vernon Savings, but 
he remained uncharged. 

Ed McBimey, former CEO of Sunbelt Savings and Loan (a $2 billion 
failure), started a new investment firm in Dallas. By press time he had 
not been charged with any wrongdoing. The FSLIC sued him for $500 
million, and the case was pending at this writing. 

Tom Gaubert, Representative Jim Wright's friend and fund-raiser, was 
charged with bank fraud at an Iowa thrift but he was found innocent. 
At press time Gaubert was working in Dallas. 

Charlie Knapp, former head of $30 billion FCA, the failure of which 
cost the FSLIC nearly $2 billion, formed Trafalgar Mortgage in Los 
Angeles in partnership with Larry Taggart, the former California savings 
and loan commissioner. At press time they were packaging mortgages 
and selling them on Wall Street as mortgage-backed securities. 

Don Dixon, the former head of Vernon Savings and Loan, had not been 
charged at press time but was the focus of an ongoing FBI investigation. 
The Wall Street Journal reported that he was "dabbling in offshore in- 
surance companies and playing golf at the La Costa Hotel and Spa." 

330 • Epilogue 

Herman Beebe pleaded guilty and was sentenced to one year and a day 
in prison. He also got immunity from additional prosecution for whatever 
he may or may not have done at dozens of failed thrifts and banks in 
northern Texas and western Louisiana. 

Mario Renda faced a potential 25-year prison term as part of his plea 
bargain in the pension-fund bribery and enibezziement case in Brooklyn. 
After testifying against his former associate, Martin Schwimmer, Renda 
was given a five-year sentence and ordered to repay over $10 million in 
restitution to the FSLIC and the FDIC. In Kansas City, where he had 
pleaded guilty in the Indian Springs State Bank and Coronado Savings, he got two years, to run concurrent with the Brooklyn five, and 
five years probation. Ditto for his five-year Florida Center Bank sentence. 
At worst, Renda probably faced no more than 42 months in a country- 
club federal facility. 

Charles Bazarian received a five-year sentence for his in\ol\ement with 
Rapp at Florida Center Bank. At press time his appeal had just been 
denied and he was living and doing business out of his Oklahoma City 
mansion. Bazarian, according to federal sources, cut a deal earlv with 
the Justice Department. Though the terms of the deal remained con- 
fidential, sources told us Bazarian wanted total immunity from prose- 
cution for anything he did at thrifts in return for his testimony against 
others. He also agreed to plead guilty to some nonthrift-rclated frauds 
involving HUD deals. Bazarian confirmed to us that he had been given 
immunity but would not elaborate. "I can't tell you an\ more. My life 
might be in danger," he said. Meanwhile, when CBS's 60 Minutes 
tracked him down in February 1989, they found him in a New York 
City hotel suite equipped with four ringing telephones. Assistants buzzed 
in and out with stock buy-and-sell slips. 

Michael Rapp took the hardest fall. His abuse of the federal witness 
protection program was a major embarrassment to federal prosecutors. 
He was sentenced to 32 years for his involvement at Flushing Federal 
Savings and Florida Center Bank and was expected to serve about eight 

Sam Daily (Renda and Franklin Winkler's associate in the Indian Springs 
State Bank deal) was sentenced to five years in a federal facility. 

At press time Franklin Winkler was still fighting extradition from Aus- 
tralia. His father, Leslie, died of natural causes in Israel while awaiting 
extradition to the United States. 

Epilogue • 331 

Tyrell Barker pleaded guilh- to misapplication of bank funds and was 
sentenced to five vears in prison with all but six months suspended. 

Loan broker Jack Franks was charged with bank fraud, pleaded guilty, 
and agreed to cooperate with tiie government. Franks was sentenced to 
five years in prison. 

Tom Nevis, Tvrell Barker's associate, convicted on 28 counts related to 
bank fraud at State Savings and Loan of Corvallis, Oregon. Nevis re- 
ceived a two year sentence, no fine. 

Jilly Rizzo was indicted in May 1989 for using overvalued security as 
collateral for loans. His trial was pending at press time. 

Judge Edmund Reggie was indicted for bank fraud in May 1989 and 
his trial was pending at press time. 


Original Sin 

1. Ivan Boesky pleaded guilty in 1986 to insider trading and securities fraud in one of 
the most celebrated white-collar crime cases in the nation's history, and he implicated Drexel 
Burnham Lambert and their junk bond king Michael Milken. Dan Walker pleaded guilty to 
bank fraud in 1987. Neil Bush's and Andrew Cuomo's forays into the bright new world of 
deregulated savings and loans ran into troubles of a different sort: Bush resigned as a Silverado 
Savings director just days after his father was nominated as the Republican candidate for 
president and three months before Silverado had to set aside $275 million to cover expected 
losses (regulators finally seized Silverado in December 1988), and Cuomo's investment group 
became entangled in a bitter lawsuit with the chairman of a related thrift. (They reached a 
settlement in 1988.) 

2. The Federal Home Loan Bank Board, a quasi-independent agency in the executive 
branch of the federal government, is responsible for all federal regulation of savings and loans. 
Gray became chairman in May 1983. 

3. By April 1989 the Justice Department had convicted over 100 people in relation to 
the 1-30 scandal and more convictions were expected. 

4. The Federal Savings and Loan Insurance Corporation insured deposits at member 

5. The FHLBB's definition of insider abuse and fraud included breach of fiduciary duty, 
self-dealing, engaging in high-risk speculative ventures, excessive expenditures and compen- 
sation and conflicts of interest, among others. 

6. The General Accounting Office is the auditing arm of Congress. 

7. Among them was the Federal Deposit Insurance Corporation which insures banks and 
some savings banks. 

8. Centennial's net worth at the time was $1.87 million. 

9. The National Thrift News was awarded the 1989 George Polk Award in Journalism 
for Financial Reporting for its coverage of the savings and loan industry. 


Endnotes ■ 333 

Chapter I. A Short History Lesson 

1 . The Kedcral Reserve System also loaned money to banks when deposits were in short 
supply, but thrifts had no such source for funds and had to borrow from banks, their prime 

■■ competitors, when they needed extra money. 

2. Mortgage foreclosures increased from 75,000 in 1928 to over 275,000 in 19^2, as 
Americans were increasingly unable to meet their house payments and thrifts were left holding 
mortgages on property that was worth less and less as the Depression deepened. 

3. The thrifts were members of their regional FHLB. 

4. Congress created the Federal Deposit Insurance Corporation (FDIC) to perform the 
' same function for banks and the National Credit Union Share Insurance Fund for credit 


I 5. Membership was mandatory for federally chartered thrifts, optional for state-chartered 
'thrifts. In ensuing years S&Ls consolidated and gradually joined the FSLIC until in 1987 

there were 4,600 savings and loans — 2,000 federally chartered, 2,600 state-chartered, and only 

600 not insured by the FSLIC. 

6. Inflation in the U.S. had traditionally fluctuated in a range below 5 percent. The rate 
from 1959 through 1969, for example, averaged 2. 3 percent. But when OPEC flexed its muscle 
in the early 1970s, oil prices rose and so did inflahon. In 1972 inflation was at 3.4 percent, 
in 1974, 12.2 percent, in 1979, 13.3 percent. 

7. The interest rate ceiling established in the 1960s limited thrifts to paying only 5.25 
percent interest on passbook savings accounts, raised to 5.5 percent in July 1979. Rate ceilings 
on time deposits of $100,000 and over had been phased out in the early 1970s. 

8. Investors could place any amount of money in money market funds anytime they 
wanted, earn rates that were even with or greater than the inflation rate, and withdraw their 
money anytime they wanted. 

9. Even when inflation began to abate in the early 1980s, the public believed it would 
return and they continued their flight from thrifts. The public was also withdrawing their 
savings from banks. 

10. TTie first major legislative effort by Congress to deregulate federally chartered S&Ls 
I came in 1973, but the movement failed. Instead, throughout the 1970s the FHLBB and 

Congress continued to tighten regulations. But the support of deregulation grew as those new 
! regulations failed to stem thrift losses. 

11. In 1974 the ceiling had been increased from $20,000 to $40,000. 

12. Lyndon Johnson's protege, Bobby Baker, convicted of stealing $100,000 and evading 
taxes in one of the most publicized political scandals of the 1960s, wrote in his book Wheeling 
and Dealing that Troop gathered money from S&L executives and funneled the money through 
Baker to pay off a senator for killing some legislation the executives opposed. Troop died in 


13. Thrift lobbyists were said to have more influence over their regulators than any other 
regulated industry, and the U.S League had traditionally participated in regulatory and leg- 
islative decisions, even going so far as to write some of the regulations. Bankers complained 
that they did not get treated as generously by Congress as did savings and loans because their 
lobbyists were not as powerful. 

334 • Endnotes 

14. And a wide varieK of otiicr kinds of accounts. 
1 5 Up from 20 percent. 

16. In opening up nonresidential real estate lending to thrifts. Congress was blurring one 
of the key differences between banks and savings and loans: banks traditionally made commercial 
real estate and construction loans and thrifts were supposed to stick to home mortgages. 

17. Technically, from that moment forward the American taxpayer was on the hook for 
thrift industry debts, but as a practical matter Congress could not have allowed the savings 
and loan industry to collapse, with or without the )oint Current Resolution, because such a 
massive default would have posed too much of a threat to the countrv's financial stability. 

18. In 1978 Congress passed the Change in Control law, which gave regulators the right 
to deny an application for a thrift charter, but in actual practice regulators exercised control 
over directors and officers but not owners. The FHLBB maintained they couldn't disapprove 
applications unless there was hard evidence of incompetence or vsrongdoing, and they believed 
they should not limit the freedom of stockholders to sell their institutions. 

19. This change was authorized by the Garn-St Germain legislation but did not take 
effect until August 1983. 

20. This FSLIC regulation took effect in 1980. 

21. Entrepreneurs could start a savings and loan for S2 million (raised to $3 million in 
1983) or buy an old one; attract, say, $300 million in brokered "hot money " deposits; loan 
that $300 million on trendy condominium units; pocket $18 million in points and fees; package 
the loans and sell them to other thrifts; and start all over. 

22. Starting salaries in 1984 were $14,000. 

23. Regulation and examination were two separate functions. Examiners were fact finders; 
regulators made the decisions. 

Chapter 2. Shades of Gray 

1. Pratt, chairman of the FHLBB from 1981 to 1983, was called by many in the thrift 
industry "The Savior of the Industry " because he presided over much of the deregulation of 
savings and loans. 

2. The Federal Reserve Board, which is the Federal Home Loan Bank Board's counterpart 
in the world of banking, has no such partisan staffing requirements. Many believe some of 
the thrift industry's problems stemmed from the politicizing of the FHLBB. 

3. Paul Volcker was the highly respected chairman of the Federal Reser\e Board from 
1979 to 1987. 

4. And they still do. 

5. CDs had terms that ranged from as long as I 5 years to as short as 30 days. The long- 
term brokered CDs were not considered a problem. The short-term CDs were. 

6. This was especially true of thrifts chartered in states where regulations were even more 
lenient than on the federal level. 

7. The FDIC insured deposits placed with banks. 

Endnotes ■ 335 

8. Isaac was chairman of tlic FDIC from 1981 to 1985. Me was succeeded in that post 
bv L. W'ilham Seidman. 

9. Federally chartered S&Ls were required to join the FSLIC. 

U). Oil prices collapsed in late 1985 and early 1986 and the Texas economy sank into a 
devastating depression. 

1 1. Cnrlee. by the way, once attended an S&L party dressed as Elvis Presley, wearing a 
gold and rhincstonc-studded jump suit. 

12. Democratic Governor Edmund Brown, )r., 1975-1983. 

B. In 1978 California had 172 state-chartered institutions. That dropped to 55 by 1983. 

14. In 1988 Nolan, an assemblyman from Glendale who became Assembly minority 
leader, resigned his position as minority leader on reports that he, among other state legislators, 
had been targeted by an FBI sting operation investigating influence peddling and political 
corruption. Nolan denied all wrongdoing, saying he was resigning because his party lost two 
Assembly seats in the November election. Assemblyman Bill Filante told the Santa Rosa Press 
Democrat. "He's under a lot of stresses." 

1 5. According to their seminar outline. 

16. Larry Taggart had been a vice president of Great American First Savings Bank in 
San Diego. 

17. The weapon used to murder Masegian was a 32-inch nylon cord with wooden knobs. 
The FBI said the commando-stvled method for death had not been used in the United States 
for 16 years. "I can't remember another case like this one, " said the Dade County medical 

18. A tiny island cluster in the Caribbean south of Cuba. 

19. Texas and California were by no means the only states with problems. Wyoming, 
which had relatively few total cases, had the most bank fraud per capita in the nation. 

20. The FSLIC insurance fund got its money from member thrifts who made payments 
to the fund, but it was also backed by the full faith and credit of the U.S. government, which 
meant that when the fund ran out of money, taxpayers would have to cover the losses. 

Chapter 3. Centennial Gears Up for Deregulation 

1. Norman Raiden, general counsel to the FHLBB during the Gray years, told us that 
of the failed savings and loans he was familiar with, the one he had the hardest time under- 
standing was Centennial Savings, because Hansen had been so well known in the thrift industry 
and had had such a good, and conservahve, reputation. 

2. Piombo Corporation was owned by Piombo Construction Company. 

3. This was a common practice among lenders and only became a problem for thrifts 
when faulty appraisals were used to justify loans much larger than the value of the collateral. 

4. This bookkeeping anomaly resulted in the most desperate thrifts making the most, the 
largest, and the riskiest loans in an attempt to make the S&Ls' financial statements look 
better — or to give the borrowers a couple of years getaway time. 

5. Prior to deregulation, boards of directors of thrifts were mainly figureheads who typically 

336 ■ Endnotes 

rubber-stamped management's requests. Primarily for that reason, they were unprepared to 
assume the tougher role that deregulation thrust upon them, and they contmued rubber- 
stamping for far too long. 

6. An attorney working on a related case told us he had discovered that the BI.A violated 
regulations and failed to exercise prudent fiduciary care in investing the trust-fund money. 
Federal officials knew about his discoveries, he said. The BIA admitted their record keeping 
was madequate and they computerized their system. But as far as we could tell, no one had 
investigated the charges of bribery. We notified the Office of the hispector General of the 
U.S. Department of the Interior ourselves and an investigator sp)enf a day with us. promising 
to conduct a thorough review. Later he said the case was "very big " and had high priority 
with his department. But it was all hush-hush, he said, so he couldn't tell us the details. Still, 
we'd be the first to know when arrests were made. Up to press time, a \car later, there were 
no further developments. 

7. The limit that a thrift could loan to one borrower varied from thrift to thrift, based 
on a formula established by regulators. Golden Pacific's limit at that hme. according to a 
former loan officer, was $500,000. 

8. TTie FSLIC later sold the building for an undisclosed sum under $1 million. 

Chapter 4. $10,000 in a Boot 

1 . In response to our questions about his loans from Centennial, Bosco wrote to McGraw- 
Hill, the publishers of this book, and admitted to receiving two loans that totaled less than 
$200,000 in 1979 and 1980 ("before any scandal attended the operation of Centennial." he 
wrote) but he failed to mention the two loans totaling $124,000 that he got in 1982 and 198?, 
while Hansen was riding high. 

2. In an advance-fee scheme a middleman promised to get a borrower a loan if the 
borrower would pay the middleman an up-front fee. Of course the middleman took the fee 
and disappeared and the borrower never saw the loan. A U.S. attorney told us he had decided 
that S&L deregulation had permitted an updated version of the advance-fee scheme: Now 
middlemen could actually produce the loan by setting the borrower up with a cooperative 

3. Senator Dolwig, Kaplan, and Gorwitz formed a company on Grand Cayman Island 
that offered to obtain large loans for prospective commercial borrowers who were ha\ ing trouble 
finding a willing lender. In return for a loan guarantee borrowers would pay the company 
$25,000 for every $1 million of financing requested. But when borrowers paid the fees Gorwitz 
flew the money to Freeport, in the Bahamas, where it disappeared, presumably into the coffers 
of fugitive mobster Salvafore Caruana. The borrower, of course, would never get the promised 
loan, .admitted hitman Jimmy "the Weasel" Fratianno said in his biography that Gorwitz and 
his partners had tried to interest him in joining them in the scam, but Jimmy, a veteran of 
scams, predicted that Kaplan was out of his league and would end up taking a fall on the 
scam, which was precisely what happened. 

4. In 1986 Binder declared bankruptcy and Centennial (by that time having been taken 
over by the FSLIC) sued for relief, stating that Binder had pledged to them security he had 
already pledged for other loans, listed real estate he did not own. and counted his home twice 
on his financial statement, once as his personal residence and again as "real estate." In his 
bankruptcy Binder listed his total unpaid debt at $5,851,755.45. He claimed cash on hand at 
the time of filing at just $239. 

Endnotes • 337 

5. This figure docs not include the hundreds of thousands of dollars the KBI would later 
discover Hansen was enibc/zling from Centennial and borrowing from Cokuubus-Marin as 

6. The FHLB's Eleventh District encompassed California, Arizona and Nevada. 

7. Alexander Grant later changed its name to Grant Thornton after it became enmeshed 
in a scandal in which a managing partner in Klorida pleaded guilty to accepting $225,000 in 
bribes to falsify' financial statements for ESM Government Securities Inc. and hide ESM's 
shaky financial situation. 

8. After the deal between Atlas Savings and Columbus-Marin Savings that let Hansen 
and Shah take $16 million in bonuses in 1984, auditors gave Centennial a clear audit even 
though a Centennial executive told Pizzo the contracts clearly indicated that Centennial had 
agreed to buy the properties right back in early 1984. 

[i Chapter ?. The Downhill Slide 

I 1. They also had to agree to submit a detailed business plan to regulators and tighten up 

• th